Dollar Due A Comback?
The US dollar has been in something of a downtrend in recent trading sessions. This is a marked changed from its previous strength.
The question for traders is as to whether the strong bull run in the greenback is in permanent decline or simply a pullback?
Expectations for an increase in rates have been around for a while. But with some shaky data on the US economy it remains to be seen if the anticipated rate rises will come to fruition.
Both the US initial jobless claims figures and the June Philly Fed index came in below prior expectations. Jobless claims came in at 27.6 vs 24.9 expected. In other data, the May import price index also showed up worse than anticipated, posting -0.3% vs -0.1 month on month.
This caused a selloff in the dollar as traders looked to perhaps a surprise announcement from the Fed later in the day.
However, the Fed did not disappoint and delivered on its promise of a rise. This caused a quick turnaround in the earlier sell off. Led by USD/JPY which ended up over 1% higher on the day.
The market has been keen to back the dollar in recent weeks with a view that the monetary policy will tighten and rates will rise.
This view was born out and indeed the Federal reserve has delivered on its 0.25% rate raise as expected. This had already been priced in to the market.
From a trading perspective, there a number of possibilities to take advantage of increased dollar strength.
The dollar index itself is looking to potentially put in a reversal from key trend line support. This index is made up mostly of the EUR/USD trade. Therefore, the natural trade would be to back increased declines in the Euro.
Of all of the dollar crossed pairs this probably makes the most sense. The British Pound, while showing an inflation pick up, is likely to remain volatile with upcoming Brexit negotiations and the fallout from the recent general election.
Commodity crosses such as the AUD/USD and NZD/USD also don’t look to be particularly attractive. However, of the two, the Australian dollar seems to continue to punch above its weight. Longer term it looks set for heavy declines. This is due to the worsening labor and trade picture that is emerging from the country.
Binary options traders could make us of pullbacks in the pair as binary options signals to go long. Alternatively trading directly on the dollar index could offer useful possibilities.