The Trade War Escalates
Over the course of the last week the dollar has shot to a new high, hit resistance, and fallen back to support. The move was driven by data, shifting FOMC policy outlook, the FOMC statement, and now, escalating trade war conditions. What we have for certain is a dollar with increasing volatility, the ultimate direction of that volatility is yet to be determined. The underlying fundamentals scream for a stronger dollar, the U.S. economy has so far been resilient while that of the EU, UK and Japan less so. The risk is that, with the new round of tit-for-tariff, the U.S. economy will begin to fell more pain.
This week there is virtually no economic data to sway the market. There is some, don’t get me wrong, but no piece is that important, important enough to shape the market’s outlook and assuage fear of global slowdown. For now, the DXY is still above support and looks like it is in an upwardly biased trend. The index is above the top of a previous range and the indicators are consistent with underlying strength if not upward continuation of trend. The $97.50 looks like a good entry point for new positions, the index may bounce from this level or fall through. A bounce is likely to move up and retest $98.50, a break through of support could lead the index down to $97.50 or $96.00.
The EUR/USD has effected what looks like a nice rebound/reversal in prices. I will caution you though, the pair is merely retracing a recent fall through support to retest resistance at that previous support level. The long-term outlook is for the dollar to appreciate because the EU economic slowdown is worse than in the U.S., the ECB is still expected to reduce rates and stimulate the economy, the FOMC is no longer expected to cut rates three times this year, and the Brexit is coming up. Resistance should be near 1.2000, once confirmed look for the EUR/USD to fall back toward 1.105. If the pair breaks through support a move to 1.2910 is possible.
The USD/JPY sank to a new long-term low in early Monday trading as safe-haven inflows drive the yen. The pair is heading down toward the 105.00 region where it is likely to bounce. This level has provided strong support in the past and there is still dollar strength to consider. Safe-haven inflows can only suppress this currency for so long. Longer-term, I expect the USD/JPY will continue to trade sideways within its multiyear range.