The US dollar managed to extend its rally from multi-year lows yesterday, when House Speaker Paul Ryan vowed to outline tax plans before the end of the month. Had it not been for the release of softer production prices for the US, perhaps the rally could have moved further. Yet tax reforms remained the dominant driving force for the remainder of the session and the greenback remained supported throughout Asia.
Whether these plans are detailed or believable enough to satisfy market expectations is yet to be seen. Trump has twice teased markets with promise of detailed plans since taking office, only to disappoint markets on both occasions. If this situation is to be repeated, the potential for another “buy the rumour, sell the fact” could leave the Greenback vulnerable once again. Further soft economic data would only make matter worse.
On the plus side, the USD Index (DXY) has bounced 1.25% this week at the time of writing. This currently makes it the most bullish week of the year and, quite fittingly, its most since Trump was elected and whipped markets into a frenzy with his speech on tax reforms. That DXY has responded with a potentially milestone week underscores the importance of tax reforms for markets, and is a potentially bullish scenario that shouldn’t be ignored. So, whist we await the outcome from this anticipated event, it would be prudent to see what price action is telling us and consider our options
Bullish Case
- DXY is amidst its most bullish week since Trump was elected
- Markets are hoping for solid plans for tax reforms which, if delivered, could provide further fuel to the rally
- A weekly close above the 2016 intraweek could be labelled as a “bear trap”
- The ‘Morning Star” reversal pattern above 91.62 suggest near-term strength is part of the bear trap
Bearish case:
- Longer-term trend remains bearish from the 2017 highs
- The weekly chart and daily charts remains in a tight, bearish channel, with strong bearish momentum
- DXY is currently within its fourth week beneath the May 2016 close-low of 93.02
- If an adequate tax plan is not delivered, traders would likely refocus on low inflation and the bearish trend
Whilst this week’s rally is doing its best to buck the trend, it remains far from an area one would confirm as being over. This places us in an area where price action could just as easily extend gains or reverse lower, making it an area to treat with caution.
As the weekly and daily charts remain in a bearish trend, the assumption, until a reversal is confirmed, is for prices to eventually move lower. Yet this is not a good reason enough to be bearish on the USD right now in our view.
Patience is a virtue
Technically, the daily trend remains bearish although signals of near-term strength remain. Over the prior three sessions, the daily chart has provided two expansion days against the dominant trend, after signalling trend exhaustion at the multi-year lows with a bullish hammer. A morning star reversal pattern also warned of pending strength ahead of the break back above the 2016 low and subsequent bullish expansion day.
Due to these near-term bullish clues, along with yesterday’s bullish expansion day, we prefer to step aside until signs of exhaustion appear beneath a zone of resistance. If this occurs we may be in a position where USD crosses look more appealing to short but, until then, we’d simply be selling into strength and hoping the trend turned our way.