23rd March - How weak is the Dollar?
27 March 2017
TECHNICALS:
Dollar Euro monthly bar chart
Within the long-term weakening channel of the Dollar, the
price action since 2004 has looked like a top formation for the Euro with the succession of lows around 1.20 looking like formidable resistance to any Euro rallies.
One result of that resistance has been the creation of a possible bear continuation Triangle beneath 1.20 which, if completed, would drive the Euro weaker and weaker - or so the Dollar bulls thought.
But the Triangle hasn't convincingly completed. Look more closely- at the weekly chart.
Dollar Euro weekly bar chart
In the weekly chart, the dithering and general reluctance to sell-off through the lower diagonal of the possible Triangle is clear.
Indeed, there is a possible Reverse Head and Shoulders in the making!
That could push the market up as far as 1.13...
Certainly back into the trading range of the last two years.
Even so, the market would have to break 1.20 on the upside to be at all convincing about a sustained and continued weakening of the Dollar.
FUNDAMENTALS:
After the surprise election win of Donald Trump, the market chatter quickly focussed on what his economic policy agenda would mean for the Dollar.
Trump campaigned on a platform that included: big increases to defence spending,
a big boost to spending on infrastructure renewal, and corporate and personal tax cuts.
The conclusion analysts and traders drew was that a spike in the budget deficit and inflation would result, and provoke the Fed to adopt a more hawkish stance with monetary policy.
But only two months after Trump took office, the Dollar rally has not only stalled, but looks set to go into reverse.
Why?
At last week’s FOMC meeting the Fed delivered the much-anticipated 25bp rate hike, the first of three flagged for 2017, but disappointed currency traders by not adopting a more hawkish tone in response to Trump’s economic policy agenda.
In fairness to the Fed, Trump has yet to roll out his economic policy agenda, and it is by no means certain he will receive the cooperation of Congress, meaning he may yet only manage a watered-down version, so the Fed could simply be keeping its “powder dry”.
But so early in Trump’s term of office, are traders and analysts justified to call time on the bullish Dollar trade?
What seems to have unnerved traders over recent days is the uncertainty over healthcare reform. In his election campaign Trump made much about repealing Obama care, but as yet it isn’t clear what will replace it. Traders and analysts have extrapolated this lack of clarity into other policy areas, notably his economic policy. This, together with the Fed’s unchanged policy tone has fed directly into the Dollar.
Add in the recent declaration by ECB President Draghi that the EC has won the battle against deflation and the Dollar is coming up against a firmer Euro. All of this has taken the Dollar to a point where it looks as though it could weaken much further.
But, as already said, these are early days in Trump’s Presidency. It is much to soon to write off his policy objectives as unattainable. We think the current spell of Dollar weakness is a correction not a trend reversal.
Looking at Dollar/Euro, the ECB has succeeded in driving inflation back up to target, but they haven’t yet achieved a self-sustaining recovery, otherwise why they are maintaining their policy stance until at least year end.
As for the Fed, we do not expect them to maintain their current stance. Trump is not a typical politician, he is a business man used to getting his own way and he will kick hard against a Congress that tries to thwart his plans. Once the Fed gets a strong handle on this, as his policies unfold, we expect the Fed to adopt a more hawkish tone. That, taken together with the reality of rising US inflation, a bigger budget deficit and a still-torpid Euro zone economy, will see the Dollar rally.
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7th April - Can the US T Note go still higher? 
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9th March - Gold is looking vulnerable