Chart of the Day: Navigating The Dollar’s Conflicting Trends
Investing.com | Sep 23, 2020 23:57
The dollar is up for a fourth straight day. That's the longest winning streak for the global reserve currency since June 19.
The persistent pandemic, hawkish Fedspeak and conflicting economic signals have been whipsawing the USD, which has lately started accelerating higher. Former FDA Commissioner Scott Gottlieb recently warned of at least one more coronavirus wave in the US “heading into the fall and winter.” Fatalities in the country have already topped 200,000 deaths and experts believe it will get worse yet.
This theme has boosted the dollar as a safe haven. Other reasons the greenback may be gaining strength: economic improvement motivating risk-on appetite, or perhaps the Fed’s follow-up statement about an “uncertain” path to economic recovery. In this scenario, according to Chicago Fed President Charles Evans, the central bank's dramatic new inflation policy allows the Federal Reserve to raise rates even before inflation averages 2%, after the market priced in near-zero interest rates for years to come.
However, these are short-term triggers, which may have caused an immediate dollar-bottom. Nonetheless, the USD has some serious structural problems, setting it up for a long-term rapid decline.
Still, not all currency experts agree that the dollar will necessarily fall in the long-term, though they expect the current rally to be short-lived with another leg down to follow.
Perhaps the technical chart tells a less confusing story.
While the dollar completed a short-term bottom, it remains within a descending channel. As well, the currency appears to have given up on today’s advance, retreating into a decline.
This price action developed a shooting-star, a bearish candlestick demonstrating a bearish counter-attack—triggered with a close—whose location on the chart, the top of the falling channel, infuses it with meaning. Should the price close at these levels, it would suggest a pullback that would put the current bottom to a test.
The price would have to penetrate the falling channel to carry through. That would strengthen the short-term uptrend. However, the medium-term is still lower, as indicated by the falling peaks and troughs in the larger swings.
The price would have to hit 98.00 to overcome the preceding June peak in order to reverse the medium trend.
In other words, trading with the short-term trend carries the risk of being blown back by the medium-term. That doesn’t mean that trading the short-term is necessarily out of the question. It just means the a-trader should have a carefully laid out, sensible plan.
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Conservative traders would consider a short after the dollar makes a new low below the Sept. 1, low of 91.75.
Moderate traders may risk a long position if the price finds support at the short-term (green) rising channel.
Aggressive traders might enter a contrarian short, counting on a pullback from both the top of the short-term rising channel and the medium-term falling channel. This could be compounded by the bearish shooting star, so they should accept the risk that the bottom may support the price. As such, tight money management would become crucial. Here’s an example:
Trade Sample
- Entry: 94.00
- Stop-Loss: 94.25
- Risk: 25 pips
- Target: 93.00
- Reward: 100 pips
- Risk:Reward Ratio: 1:4
Author's Note: This is just a trade sample. Not a full-out degree in trading. The lesson can be learned from the full post. As well, this is not necessarily the only way to trade the USD. Understand the analysis, find your risk-tolerance level and factor in your timing and budget. If you can’t understand the post and don’t know how to fit the trade to your needs, your results will be random and hold no statistical significance.
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