The Dollar Outlook: Bullish With Resistance In Sight

The Wuhan Connection

The dollar has been moving higher over the last few weeks and the outlook is bullish. The FOMC reaffirmed the U.S. economy, the FOMC chief’s testimony to Congress reaffirmed the meeting and policy statement, the data supports that outlook, and the forecast for 2020 is steady if not edging higher. Add to this growing fear of economic fallout related to the Wuhan virus and traders around the world are putting their money on the U.S.

The Dollar Index (DXY) has risen 4% since the beginning of the year and looks like it could go higher. The MACD momentum is bullish and strong with a convergence that bodes well for underlying market health. Stochastic is also bullish and firing a crossover but there some red flags present. For one, stochastic is high in overbought territory putting the market in danger of correction. For another, price action is within spitting distance of major resistance that could easily cap gains.

If the index is able to move higher it is likely to hit resistance in the range of $99.25 and $99.70, well before the $100 level. Next week’s economic calander has several items that could push the market up to that level, a perfect storm may push it up to a new high. Topping the list is the FOMC minutes release. If the FOMC sounds hawkish or like a hike is more probable than a cut this market is going to go through the roof. After the minutes there are reads on manufacturing, housing, and leading indicators to watch out for.

New Lows For The Euro Ahead

The EUR/USD broke to new lows this week and may be headed lower, weak industrial production and tepid inflation are the most likely culprits. With the pair trading at a two and half year low the next targets for support are significantly lower. The best target for firm support is near the 1.0720 level or roughly 120 pips below the current price action. The indicators are bearish and pointing lower on the weekly and daily charts so I don’t expect to see buyers step in without big news or price action hitting a key technical level. Potential market movers in next week’s news are CPI and PPI figures for the EU, due out at the end of the week, and PMI from member nations throughout the week.

Pound On Firmer Ground

The GBP/USD is on firmer ground having risen over the past week and trending sideways over the short-term. The pound and UK economy appear to be stable following the Brexit with a positive outlook associated with freer trade. The economic calendar is filled with UK data next week so there is risk of heightened day to day volatility. So long as the run doesn’t not produce any negative surprises or worse, trends, I expect to see this pair move up to the 1.3200 and 1.3370 levels.