Technical and Fundamental Breakdown of the US Dollar

I feel like I have touched base on many introductory concepts of trading Forex and believe it is only right to do our first analysis based post. What better way to do that then analyzing the world’s most powerful & important currency? If you have been keeping up with global news then you’d know that the United States of American are in a few global conflicts which has proximal and distal implications on it’s precious US Dollar. I will talk about what and who these conflicts are with in the fundamental analysis portion of this article. I take a combination approach to my analysis, using technicals in conjunction with fundamental sentiment to place my trades. I advise many do the same, and the reasons for why are explained in my previous blog post Technical or Fundamental Analysis…or both?

Without further ado, let us take a dive into what technical analysis is indicating for the Dollar Index (DXY). The Dollar Index (DXY) is a measure of the US Dollar’s strength relative to other currencies.

US DOLLAR INDEX (DXY) – DAILY TIME FRAME

Technical Analysis Break Down:

1. There is a clear ascending channel seen on the daily time frame. Price has been making consistent higher highs and higher lows initiated at the start of the year.
2. The index is currently on it’s fifth wave of the ascending channel that was created by a rejection to resistance at the 98.3xx region.
3. The rejection at the resistance of the 98.3xx region has lead to a noticeable double top pattern, with a neckline indicated by the horizontal ray just below said resistance.
4. The index has used this neckline as a support as the previous daily candle struggled to close below it.
5. Currently we are presenting a significant bearish candle which by the looks of it will indeed close below the neckline.
6. Following such a close, we can predict with high probability that the index will be on it’s way to meet the bottom trend line of the ascending channel at the 97.6xx region.
7. At that point, I advise one to close out of sell’s against the US Dollar until further bearish activity. Ideally, a break and close below & outside the ascending channel. Such a move will indicate a visit to the 96.3xx region.
8. If the DXY bounces off the bottom trend line, we can assume that it will respect the ascending channel and make a possible move back to the upside and/or at least to retest the 97.0xx zone.

I recommend you to plot these level’s on your chart and to track the movement of the index to get a feel for what the current strength of the US Dollar is.

In short as far as technicals are concerned, we have a short-term bearish bias on the DXY up until a certain point, at which we could see some recovery.

Now let’s take a fundamental approach to our analysis.

The United States of America and its Current Global Conflicts

1. The ongoing trade-war with China remains at the top of the list for distal causes of US Dollar weakness. I recently wrote an article going into depth about this trade fiasco, see more here: The US-China Trade War and What it Means for the FX Markets
2. Today is the first Friday of the month, so you know what that means? The dreaded and daunting Non-Farm Pay Roll Release, abbreviated as NFP. In short, it represents the number of paying jobs excluding farmers, government employees, private companies and employees of non-profit organizations. For US Dollar Strength, they would always want to report more jobs than foretasted. Unfortunately for the US Dollar, the US economy was only able to add 75,000 jobs, almost a 100,000 short of it’s foretasted 177,000. Despite unemployment remaining the same at 3.6%, we saw the USD slip against the Euro and other majors. The lackluster NFP is another stain on the US economy in addition to the Federal Reserves plan to have two more rate cuts by year end.
3. The Trump administration has put sanctions on Iran after they accused Iran’s Islamic Revolutionary Guards Corps for attacking four oil tankers off the coast of the UAE. The United States of America has designated the accused group as a terrorist organization, and believes Iran is giving them full support to carry out such attacks. This has led the US to put new sanctions on Iran’s largest petrochemical company for providing support to the Revolutionary Guards Corps. The problem with this conflict is that initially members of the European Union were siding with the Trump administration, however they do not want to impose the same economic sanctions on Iran as the US. Members such as Britain, France and Germany are looking for an alternative payment payment mechanism to replace the dominated American banking system to allow Iran to export oil and other goods. Although there isn’t an alternative as of yet, officials from the European Union made a statement to explain their regret for the current sanctions, and that they would devise a alternative payment vehicle. If the European Union ends up finding such a vehicle, it will cause a major strain on trans-Atlantic relations with the United States. In addition to being a breach of trust, this alternative payment mechanical can be replicated with other nations, leaving the once heavily global dominated American banking system in ruins.
4. In the last week of May, the Trump administration threatens Mexico with 5% tariffs on all exports unless the Mexican government took measures to control the flow of illegal immigrants into the United States.

That should cover most the short-term fundamental causes for the current and maybe future lack of US Dollar strength. I did leave out a few other minor fundamental causes, but this list should enclose the major concerns at hand.

In conclusion, my technical and fundamental analysis does agree on a weaker dollar, at least for the near term, If trade deals are made, sanctions are lifted and threats of tariffs are withdrawn, we may see the opposite.

Hope this first analytical article will help you see what the current situation for the US Dollar is, and what it may look like in the future pending certain events.

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