Is the USD about to drop 5% or rally 10%?

August 13, 2020 11:48

The US dollar has been one of the weakest currencies in recent months, helping to lift the euro, British pound, gold and other G10 currencies. The government's handling of the coronavirus has particularly hurt the dollar, as well as Trump's tough talk on trade and China. However, some analysts believe a new rally higher may be on the cards. Read on to learn more.

The US dollar's big issues

One argument that has contributed to the weakness in the US dollar has been potential for growth to slow further in the economy. Fears of a second wave of the coronavirus and the inability for some states to get out of lockdown have weighed on sentiment.

However, the economic data is suggesting something different. The eurozone posted second-quarter growth numbers that showed a more aggressive slowdown than the US. Recent data points in the US such as PMI (Purchasing Managers Index) figures are showing signs of a potential rebound.

Over the past few months, traders have been keen to bet big on Europe. With a better government response in the handling of the coronavirus, traders are expecting the European economy to rebound quicker than the US. But now, parts of Europe are seeing the potential of a second wave just as the holiday season kicks into gear with individuals eager to travel abroad.

In the current situation, there are both bullish and bearish reasons why the US dollar could move in a certain direction. As ever, the clues should always be in the price action as that is where traders are putting money on the line.

How to trade US dollar index

With Admiral Markets UK Ltd you can speculate on the price direction of the US dollar through the US Dollar Index Futures CFD (Contracts for Difference). This allows you to trade long and short, using leverage.

Below is the long-term, monthly chart of the US Dollar Index Futures CFD:

Source: Admiral Markets MetaTrader 5, #USDX_U0, Monthly - Data range: from 1 March 2008 to 13 August 2020. Please note: Past performance is not a reliable indicator of future results.

In the chart above it is clear to see the long-term trading range that has developed in between horizontal resistance and support (the two longer black lines on the chart). Traders will typically choose to employ reversion to the mean trading strategies on these types of markets by identifying potential short positions at the top resistance line and potential long positions off the bottom support line.

Some traders may just wait for the price to break out of the range to continue in a trend. As the chart above is of a monthly time frame, most traders would look to trade a trend in between these two levels. At the time of writing, the US dollar index is hovering around intermediate support around the 92.00 level.

If price breaks through this level, then there could be a 5% drop back to the lower support level. However, if economic news starts to turn positive for the US dollar, then a bounce off the 92.00 level could send the dollar soaring back to the top resistance line which is around 10% higher.

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