The U.S. Dollar Bull Run Is Gathering Steam: What’s Next?
Last week, on the heels of better than expected U.S. economic growth figures, the US Dollar Index (USDI) finally pierced above a multi-year resistance level.
That’s important because we’ve been flirting with this upper resistance level for some time. The market has churned sideways for literally months. And each time USDI has been rebuffed it tried to rally.
Not any more. It feels different this time… I believe the USD uptrend appears poised to shift into a higher gear.
In the past, I’ve speculated on the possibility of a lower U.S. dollar. I think that time has passed and the dollar is only moving higher.
We can make a bullish case for USDI with the inverted head and shoulders pattern I’ve drawn for you below. You can see the overall pattern slopes up, with the right shoulder being rather longer and with a pronounced uptrend along the way.
It looks increasingly likely that the dollar is upward bound and nothing is likely to stop it in the near term.
That has implications for all the USD-related FX pairs, of course.
EURUSD (the Euro against the dollar) hit multi-year lows at 1.11 and is trading at the lower end of a bearish head-and-shoulders pattern.
Based on the size and trajectory of this pattern, the next objective appears to be the 1.04 price level we last saw in 2017, and then parity (1:1) with the dollar.
As you can see, EURUSD still has some support levels it needs to take out along the way. But when USD starts reaching for new highs I think we’ll see those support levels melt away fairly quickly.
Now for USDJPY (the dollar against the yen), my (until this week) favorite short in the currency market.
I’ve been a very staunch bear on this pair for quite some time now.
But in light of the apparent dollar strength we’re seeing, I’m now taking a slightly different view on this pair.
That’s because USDJPY appears to have caught a bid with some genuine support at current levels.
It also hasn’t escaped my notice that the long-term price pattern is now starting to resemble a symmetrical triangle. Such a triangle could be bullish or bearish, depending on which trendline gets broken first.
As a result, perhaps the long-anticipated collapse in USDJPY I’ve been awaiting has been put on hold indefinitely.
Accordingly, I’ve taken profits on my short USDJPY positions and await further developments in this pair.
I’m on the sidelines for now.
Recent rallies in AUDUSD and NZDUSD (Australian dollar and New Zealand dollar against the U.S. dollar) have fizzled out too. I was cautiously bullish on both these pairs, yet the rallies were evidently just “dead-cat bounces” within a long-term secular bear market in these pairs. My cautious bullishness has turned bearish once again.
As the dollar strengthens, I expect AUDUSD and NZDUSD to hit multi-year lows in the not-too-distant future.
Here’s AUDUSD for reference:
Note that the recent rally in this pair only managed to hit the recent downtrend line, not cross it. (I was waiting for that line to be crossed and the price to move above 0.78 before I would consider a true bull market to have emerged here.)
Now I expect the new target is the neckline of the descending triangle I’ve drawn for you. AUDUSD might drift sideways for a while but the long-term trend will ultimately be down.
So what about the precious metals? Will they hold up in the face of dollar strength or collapse back into their earlier trading ranges?
XAUUSD (spot gold) has soared to $1,452, following a breakout above a six-year resistance level. Since then gold has settled in a consolidation zone between $1,380 and $1,440. I think this will hold for now, and I’m on the sidelines at the moment.
That’s partly because the more interesting metal to watch at this time is XAGUSD (spot silver). Following many years in a deep slumber ranging between $14 and $18, this metal appears to be waking up.
Silver has just broken out of its downtrend of several years, as we see here:
Penetration above the $17 price level would pierce a long-term downtrend line. And that could be a catalyst for a broad move higher.
Accordingly, I’m interested in going long silver if the momentum continues. Consider placing a buy stop at the $16.65 level with a profit target at $18.50. Your stop loss should be around the $16 level.
XAGUSD needs to get above $17.50 – $18.00 to confirm turn-around and that’s what we’re looking for with this trade. If and when that happens, then we can assess if the metals can keep moving up with the dollar (or not).
Please be patient. After all, I expect trading during August will be fairly quiet due to seasonality. That’s why the above trade will only be triggered if silver does in fact lunge up and buck the sleepy summer seasonality trend of low volatility.
Meanwhile, the US stock indices soared to all-time highs.
However, the Dow Jones Industrials index (DJ30) has formed two narrow range bars at its peak. This suggests the recent rally may be stalling out.
A narrow range bar (also known as an inside bar) is where the high and low is contained within the previous longer bar. Inside bars represent “stored energy” that will be explosively released sooner or later.
If the energy release is in fact, down, a penetration below the low of those past two weekly narrow range bars could be a catalyst for some traction to the downside.
And because we’re seeing these inside bars after a new high, I’m setting up a trade in the event DJ30 breaks lower out of this stored energy logjam.
Consider putting a sell stop at 27,050 with a stop loss at 27,150. Your profit target should be around 26,500.
So that’s the thesis for this week: long USD, wait and see with gold, consider a speculative long on silver, and consider and a speculative short on the U.S. stock market too.
August will likely be a low volatility month due to summer holidays and seasonality, so be patient and don’t chase any trades.
I wish you a very healthy and prosperous trading week.
Mark “USDAscendant” Shawzin