Dollar Outlook: Shifting Themes Provide Trading Opportunities

Dollar Outlook: Shifting Themes Provide Trading Opportunities

The dollar has strengthened over the last two weeks, and the table could be set for that trend to continue next week.

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It has been quite a week for the dollar, and it is easy to see how events from this week are in place to be the main trading themes for next week. Major news, key data, and important trend reversals were all in play through the end of the week.

On a more technical note regarding the dollar, rates are rising, earnings have been robust, and inflation is ranging around 2%. These factors contribute to a more constructive view of the dollar over the medium to longer term, and the Dollar Currency Index (DXY), has been rising since mid-April as a result.

While a weak dollar was the central theme in global forex markets in the first quarter of 2018, we could see that dramatically changing as we move through Q2.

 

chart built by Jason Pfaff in TradingView

 

In the near term, the fundamental news flow and speculation has added a tint of ambiguity. The narrative around the rate hike path for the Fed is still more of a debate about just how many rate hikes we might see over the next 12 months. The US has taken an offensive tack with China on trade, and key economic leaders from both nations have been huddled all week.

Soon the US will have to make a decision on future sanctions with Iran. While not a scenario that could pose a direct hit to the value of the dollar, the decision will directly impact the price of crude oil, a key ingredient of both the domestic and global economic engine.

This provides a curious infection point for the overall trajectory of the dollar.

We see a stronger dollar re-emerging as an overall theme that could direct markets through the middle frame of 2018.

However, the fundamental picture is providing just enough mystery to keep things interesting.

 

Euro Weakness Continues

The euro crossed 1.2400 in mid-April, and since that time, we have seen a fall below 1.2000 and a consistent close beneath that level over the past several days.

Our base case is built on an opinion that through the early frames of 2018, the dollar has been significantly oversold, especially in light of tepid data emanating from Europe, and over the next quarter we should see a rebalancing marked by a continued strengthening in the dollar.

This trend could accelerate through next week which would bring closing values below 1.1900 in EURUSD next week.

 

chart built by Jason Pfaff in TradingView

 

The Pound Has Shown Weakness

The trend in GBPUSD has taken a similar path. We continue to range lower and carve lower highs and lower lows. Meaningful resistance is not in place in our view until 1.34500.

With a continuation of the current path, and continued good news out of the US, we could see that previously mentioned level of resistance next week.

 

chart built by Jason Pfaff in TradingView

 

The Aussie Dollar is a Complicated Picture

In trading this week, the Australian Dollar has over performed on the back of an upgraded inflation outlook from the Royal Bank of Australia. The signal was clear that higher rates are to be expected at some point in the future.

The Australian dollar had been weakening versus the US dollar over the past three weeks as the dollar strengthened broadly, however, the news this week allowed the Aussie dollar to retrace some of those losses.

Over the longer term, we see the tide of rising inflation and rates being a challenge for commodity dependent currencies like Australia’s.

In the near term, we see the move this week as an overreaction. While the news from Australia was certainly positive for their currency, the retracement might be too much too soon, and we could see another steep move in the direction of further downward correction next week.

 

chart built by Jason Pfaff in TradingView

 

The Dollar Outlook for Next Week

Short term binary options traders have several opportunities to build a strategy around potential moves in the dollar next week.

As the market continues to digest fallout from the Fed meeting, trade talks and jobs data, we envision a strengthening of the move towards a stronger dollar.

Simply put, the news from the US is good, the dollar had been oversold, and the global forex markets will need to rebalance based on that theme.

Last April, the DXY was over 100.00 and we could potentially see a return to that level by the close of 2018.

In the middle section of this April, we saw a reversal of a weak dollar, and what might be the start of a climb higher to that 100.00 level.

If that scenario were to play out, next week should be a period where the market begins to consolidate around that view.

Risks to this outlook include fundamental news that could be seen as destabilizing to the current trajectory of US growth. For example, if news coming out of this weeks trade talks with China begin to paint a picture of a resumption of trade war speculation, that could stall a dollar rally.

Providing additional insight into the potential for movement next week, below is the average true range calculation for the dollar versus several global counterparts. The model is built on average movement per week over and calculated based on the last ten weeks of data. These are the average ranges these pairs have traversed in a week, which should provide additional insght to binary option traders as they consider possible positions and just how much the market could move over next week.

Traders should closely monitor market indicators in the early stages of next week as they consider their positioning. For additional live technical analysis on next week’s trading action, check out this upcoming webinar

 

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