Another day, another President Trump broadside. No, we’re not talking about the wall, NAFTA and bad jokes, but the interview the president gave concerning China. In a nutshell, Trump is considering a big fine for China’s intellectual property theft and there is now much speculation that Trump will use his State of the Union address at the end of the month to announce several trade measures to punish China. Interestingly, it was only yesterday that the president said that China has stopped short of meeting the criteria for currency manipulation. This, remember, was one of his big campaign policies, so Trump is now beginning to ratchet up trade-war tensions.
The effect on the dollar, if any type of trade conflict unfolds, cannot be overstated and yet as we all know, POTUS is prone to sabre-rattling and not following through on his threats. It’s obviously the last thing dollar bulls want to hear right now, having been beaten down last year and at this year's start. We also have government-shutdown fears to contend with.
From Bullishness To Bearishness
Interestingly, dollar index traders are heavily positioned for more downside, just off the most bearish positioning in futures markets since mid-2014. And in many ways, this shift from extreme bullishness at the start of 2017 to bearishness does offer some succor to bulls as it offers a good contrarian signal. Similarly, US 10 year yields are hitting highs above 2.60% for the first time since March 2017, while Fed funds are pricing in an 88% chance of a rate hike in March with a greater-than 50% chance of three hikes in total this year.
We can see the dollar decline quite clearly on the daily candle chart. Buck bears smashed through 2017 lows last week selling USD and buying EURs on the back of positive steps forward in the German political situation.
What has grabbed our attention on USD is this week's price action. We printed a bullish reversal bar on Wednesday, which can be a major reversal pattern if the market is in a downtrend for a considerable period of time. The 90.20/40 zone has also supported prices for the whole of this week so far.
Key Levels To Watch
- The 2017 lows around 91.00, which match this week’s highs; so this area is now key resistance.
- On the downside, the March 2009 high is significant at 89.62. It’s difficult to call a USD decline bottom but we will be looking to see whether the price action this week can support prices in the short term.