The US dollar came under pressure once again today, with the US Dollar Index daily chart moving lower during the trading session, and breaking below the psychological 80.00 level once again, to close at 79.69 as we come to the end of another trading week, and providing an injection of bullish momentum into the major currency pairs, including the Euro. This negative sentiment for the dollar first appeared in mid November with a failure to breach the 81.50 region, with a series of isolated pivot highs posted at this level, before the trend promptly rolled over, reversing from bullish to bearish with no transition on the daily chart, and remaining negative ever since. This has also been a feature on the three day chart, with the trend here failing to attain a bullish phase, and only moving from bearish to white, before returning to bearish at the start of December. The volume on the three day chart also remains bearish, with only minor bouts of buying, and this is mirrored on the daily chart, where any buying volumes have remained modest, and certainly lacking the required levels to reverse the current trend. Finally the heatmap remains firmly bearish, and with a conservative entry signal to the short side having been triggered on the December 2nd, the outlook for the US dollar remains firmly negative.
From a technical perspective, the key price level is that defined by the isolated pivot lows in the 78.68 region, and if this area is breached, then we can expect to see the US dollar index move deeper, to test the next level in the 78.05. Should this level fail to hold, the next deep area of potential support is in the 76 region. What is particularly interesting about the current weakness in the US dollar, is where this is being reflected in related markets. Normally of course we would expect to see a weak dollar pushing commodities higher, but in today’s trading session, this has certainly not been the case, with both gold and silver, falling, along with the dollar. WTI oil prices rose marginally, but with little real enthusiasm. The major currency pairs however have benefitted, with both the EUR/USD and the GBP/USD climbing strongly as a result, and looking set to continue higher next week, but with the fiscal cliff now looming on the horizon anything could happen to the US dollar. The question everyone is asking is what!
At first glance of course, we would expect to see further weakness for the US dollar, which as always is counter balanced by it’s safe haven status. And this is the key. Whilst the Fiscal cliff would be bad for the US economy, US equities, and risk appetite in general, the US dollar may ultimately be a beneficiary, due to it’s safe haven status. After all, US Treasuries still remain the safest asset available, and ironically this ‘bad news’ story, may ultimately see the US dollar bounce back as a result. Other currencies are also seen as increasingly safe haven, with the Australian Dollar, New Zealand Dollar, and the Canadian Dollar all likely to see buyers flood into these markets in search of safe haven homes. This change in sentiment is increasingly apparent throughout the markets, and whilst the US dollar remains the currency of first reserve, investors are now searching out alternative safe haven assets in these turbulent times. Should we ultimately fall off the Fiscal Cliff in due course, don’t be fooled into thinking the US dollar will continue lower – it may surprise everyone and move sharply higher, along with many other safe haven currencies.
By Anna Coulling