EURUSD update

By David Morrison  |  11/04/2018 08:14

We look at a daily chart of the EURUSD and ask what could be next for the dollar

Reserve currency

No matter what you trade, it’s vitally important to keep a close eye on what’s happening to the US dollar. After all, it’s the world’s reserve currency and most exchange-traded commodities (such as oil, gold and agricultural products) are priced in it. Indeed, most physical commodity transactions are carried out in dollars while dollar-denominated US Treasuries are the ultimate “go to” safe haven. In times of severe economic distress – unless the stresses are specific to the US – investors buy dollars to purchase US bonds. In contrast, we often see the dollar slide in good times while the currencies of other countries, such as commodity producers like Australia, Canada and Russia, rise.

Euro benchmark

You can measure confidence in the dollar relative to any other country’s currency. But for traders the most important pairing is against the euro, primarily because the US and the Euro zone account for around half of global GDP. This also makes the Dollar Index a useful measure as the euro accounts for 57.6% of the index with the Japanese yen next with a weighting of 13.6% - then the British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).

Rangebound

The dollar sold off steadily (which meant the EURUSD rallied) from 2017 to early this year. But both the Dollar Index and EURUSD have been rangebound ever since. At some stage we’ll see a breakout. The only question now is which direction? Will we see a continuation of the weak dollar trend, or is it about to reverse? Fundamentally, the dollar should be getting support from higher US interest rates relative to other major central banks and the Fed’s steady removal of monetary stimulus as it winds down its balance sheet. The European Central Bank (ECB) shows little appetite for tightening monetary policy despite jawboning by members of the Governing Council, including hawkish comments yesterday from ECB member Ewald Nowotny.  However, the Trump administration is known to favour a weaker dollar to boost exports and help “Make America Great Again”. At the same time, unfunded tax cuts and Congress’s spending proposals are increasing the deficit and adding to the national debt. These are negatives for the greenback.

Technical picture

Technically, we can see support for the EURUSD coming in around 1.2200/1.2230. But a few more lower highs could put downside pressure on the pair with the possibility that support breaks. On the flip side the current range could continue for a while, particularly given the competing yet apparently equal forces pulling on the currency pair for now. However, an upside break (meaning further dollar weakness) could happen if the ECB indicates that it is preparing to remove monetary stimulus, and the market believes it this time. Meanwhile, it’s worth noting that although large speculators have recently reduced their dollar shorts, positioning remains extremely bearish. The danger is that any news that any positive news for the greenback could lead the dollar bears to cover their positions, leading to a sharp sell-off in the EURUSD. All-in-all, we can expect volatility to shoot higher once the range is broken.  


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