After a shocking US employment report for May - showing only 75,000 jobs were added to the economy against an expected 177,000 - the US dollar collapsed, adding weight to JP Morgan's warning of an imminent explosion in the currency.
In this article, we explain some of the pressures the US dollar is facing, what some analysts are thinking and the possible trading opportunities around the shocking jobs report. Let's get started!
The major pressures on the US dollar right now
One of the biggest pressures on the US dollar right now is the US Federal Reserve's monetary policy stance. At the beginning of the year, the Fed surprised the market by cutting back on its plan to raise interest rates this year. Before this, the central bank had been notoriously bullish on future interest rate hikes, helping to lift the US dollar.
However, the ongoing US-China trade war, extreme long positioning in the US dollar currency, a wavering central bank and a poor jobs report have caused some US dollar bulls to exit the market. Also of note is the warning sign of an imminent explosion in the US dollar from the JP Morgan Global FX Volatility Index.
Over the past 25 years, when the index has reached its current levels the US dollar exploded 10% - sometimes to the upside and sometimes to the downside (as it is purely a measure of volatility, rather than direction). However, the technical picture is suggesting that buyers have failed to push the US dollar to new 2019 highs, opening the possibility of the US dollar sinking to a new 2019 low. Let's take a look at the charts.
How to trade the US Dollar Index
The price chart below is of the US dollar futures index which is an index of the value of the US dollar against a basket of different currencies. With Admiral Markets you can speculate on the price direction of this index by using a CFD (Contract for Difference). One of the benefits of this product is the fact you can go long or short on the market.
Source: Admiral Markets MetaTrader 4, USD.X, Weekly - Data range: from Sept 21, 2014, to Jun 10, 2019, accessed on Jun 10, 2019, at 7:11 pm BST. - Please note: Past performance is not a reliable indicator of future results.
Many traders use the US dollar index CFD to identify a directional bias on the US dollar to then trade on another currency pair involving the dollar, such as EUR/USD, GBP/USD, AUD/USD, etc. In the above chart, it is clear to see the rise in the US dollar during 2018 - a time when the Fed was increasing interesting rates. However, so far in 2019, the price has struggled to stay above the high of 2018 of $97.72 as shown by the horizontal blue line.
In fact, buyers have struggled several times to clear the high of 2018 as highlighted by the yellow box in the chart below:
Source: Admiral Markets MetaTrader 4, USD.X, Weekly - Data range: from Oct 16, 2016, to Jun 10, 2019, accessed on Jun 10, 2019, at 7:19 pm BST. - Please note: Past performance is not a reliable indicator of future results.
Traders will often call these 'failure' areas a 'resistance line'. As buyers have tried - and failed - to break above the resistance line it opens the possibility of the market falling further to the downside - until buyers are prepared to try again. These areas are known as 'support lines'. In the case of the US dollar index CFD, the most obvious support line will be a test of the 2019 low of $95.04, made on the first week of trading in 2019, as highlighted by the blue support line in the chart below:
Source: Admiral Markets MetaTrader 4, USD.X, Weekly - Data range: from Oct 16, 2016, to Jun 10, 2019, accessed on Jun 10, 2019, at 7:24 pm BST. - Please note: Past performance is not a reliable indicator of future results.
If the selling momentum continues to the downside, currency pairs such as the EUR/USD may benefit. This would mean traders could be focusing on the EUR/USD pushing higher towards the 2019 high of 1.1569 as the chart below shows:
Source: Admiral Markets MetaTrader 4, EURUSD, Weekly - Data range: from Oct 30, 2016, to Jun 10, 2019, accessed on Jun 10, 2019, at 7:33 pm BST. - Please note: Past performance is not a reliable indicator of future results.
The US dollar dominance in 2018 is now looking increasingly under threat this year. If JP Morgan's Global FX Volatility Index is to be believed, the US dollar is facing the possibility of a significant move to the upside or downside. How will you be trading it?
If you're feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and CFDs on up to 80+ currencies, with the latest market updates and technical analysis provided for FREE! Click the banner below to open your live account today!
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