USD Outlook: Embrace Pullbacks as the Currency War Rages On

USD Pullbacks? Embrace Them—Currency War Continues!

Jan 01, 2025

The dollar is expected to test the 108 to 109 range, with an overshoot to 112. This higher target is predicated on achieving a monthly close at or above 105.90 and maintaining this level without closing below it on a weekly basis. Market update July 21, 2024

The targets of 108 to 109 remain firmly in play, but reaching 110 will be more challenging. For momentum to build, the dollar index must surpass two key milestones. A close at or above 102.60 is crucial, signalling that the worst is over and setting the stage for a test of the 105.60 to 105.90 range. To confirm further upside, a monthly close within this range (105.60 to 105.90) is necessary, with higher closes being more favourable. Achieving this will open up the potential for targets of 108 to 109. We will evaluate targets beyond 109 if and when 108 is breached. Market update September 15, 2024

The dollar seems destined to retest the 108 mark, give or take 0.50. Aggressive investors may want to capitalise on strong pullbacks by going long via UUP or purchasing LEAPs. Market update October 31, 2024

Those participating in the trade outlined in the October 31st update should consider locking in profits at this stage.

The dollar traded past the 108 mark before pulling back, with the pattern now showing significant strength. This move supports the notion that the predictions of the BRICS currency replacing the USD were and are rubbish (at least for now). The increased demand for the dollar suggests its dominance remains intact. There is a possibility the dollar index could test the 109 range before experiencing another pullback. If, during this pullback, the index holds steady at or above 105, it would be a bullish signal, potentially paving the way for a test of the 112.20 to 112.80 range.

However, there’s a twist. While the demand for dollars is rising, these dollars are not being held within U.S. banks. Instead, they are being used outside the Western banking system to settle trades. This reflects a Machiavellian strategy, where the world’s reserve currency is being leveraged, yet the U.S. receives almost no benefit. Additionally, as the dollar is used outside the U.S. banking system, its strength is increasing the purchasing power of other nations. If our hypothesis proves correct, it suggests that inflationary pressures may not ease as sharply in the West. Meanwhile, deflationary forces are already taking hold in China and are spreading to several Asian countries.

The dollar’s pattern has improved since the last update. It trades overbought territory on the weekly charts, so a consolidation or pullback would be ideal before it resumes its upward trend. If it can hold steady at or above 105 on a weekly basis while our indicators pull back, it will strengthen the case for a potential test of the 110 to 112 range.

Traders can consider entering new longs on a test of the 104.70 to 105.00 range using UUP. For those with a higher risk tolerance, purchasing LEAPS (calls) on UUP offers an alternative with more leverage.

A look back at History

In the grand scheme of things, it’s important to look for signs that the market may have reached its peak. While the current recovery may not be sustainable, it’s not wise to argue against it. The trend is upward, and that’s what matters. The monthly charts also show a bullish trend, indicating that this rally has a strong foundation.

As long as the trend remains positive, the dollar is likely to test 88.00, and if the trend is still strong when it reaches that level, it could potentially exceed 90.00. However, a long-term downtrend line on the monthly charts may signal the rally’s end at around 91.00-92.00. Ultimately, the trend indicator will be the final call. Market Update Sept 30, 2014

All the above came into play, and all the targets we issued over the years were hit. This is what we had to say from 2021 to 2023

This is an intriguing development as the dollar is expected to mount a multi-month rally that could last well towards the end of 2022 but with a good chance of spreading until Mid 2023.

The dollar has generated a multi-month buy signal. Until 97.05 is taken out, the action will remain volatile. Hence, aggressive traders that play futures or currencies should view all pullbacks through a bullish lens. Market Update Oct 16, 2021

The dollar has fulfilled its primary objective, but it is still expected to rally until 2023. It is trading in the insanely overbought ranges on the weekly charts, so it’s ripe for consolidation. A weekly break below 105.90 will push into a corrective mode that can last several weeks. It is expected to test the 111 ranges and possibly trade as high as 114 before putting in a multi-year to multi-decade top. Market update July 24, 2022

The dollar is still expected to rally to new highs before putting a multi-month to multi-year top (which could morph into a nine to 11-year top). There are two things to keep in mind. From a risk-to-reward ratio, the juicy part of this trade is over. Secondly, this last phase is the tail end part of the move. 10% of the time, it fails to manifest, as was the case with major indices in 2022. In intensity, it is almost as strong as the first part of a bull move. Market Update Jan 30, 2023

Dollar outlook Aug 2018

The outlook for the US dollar index appears positive, indicating the possibility of the US dollar outperforming other major currencies. In a trade war between the Trump administration and the EU, the Euro may trade on par with the dollar. The Fed is well-positioned to tackle the next stage of the currency wars. By raising interest rates early in the cycle, the Fed can easily lower them in the future if necessary. Countries that try to match US interest rates risk rapid currency devaluation, leading to high inflation.

The US has various tools to counteract any nation that decides to engage with it. It is expected that Europe will work with the US, enabling both countries to pressure China to come to the negotiating table. This move could trigger a positive change in China, similar to what happened in Taiwan when it broke away from mainland China. In conclusion, the US dollar index chart is currently bullish, and the multi-year bull market for the US dollar remains intact.

USD Outlook: Historical View (2015)

The potential for a correction in the dollar is present, as a close below 82.80 for more than 3 consecutive days could lead to a test of the 81.80-82.20 support levels. The custom MACD indicator is crucial to identify the correction’s momentum, and the green line crossing over the purple line would signal a more substantial correction. The SD MACDS can provide further insight into the correction’s strength, with a negative turn indicated by red dots below the lower SD band. Nevertheless, as long as the trend remains positive, every significant pullback should be considered a buying opportunity. Both MACD and the custom RSI indicator versions are currently in bullish mode. Tactical Investor March 2015

Conclusion

The dollar appears to have already put in or is close to putting in a secondary bottom. The resulting rally is expected to reach a multi-year peak that may last a decade. This final rally phase, referred to as the tail end of the move, fails to materialise 10% of the time, as was seen with major indices in 2022. In intensity, it’s almost as strong as the initial part of a bullish move. Market Update March 7, 2023

USD outlook: General reasons for the dollar rise

From 2014 onwards, the US dollar started to gain strength against major currencies like the Euro, British Pound, and Japanese Yen. Several factors contributed to the power of the USD during this period, including:

Improving the US economy: The US economy was showing signs of improvement, with more vigorous growth, lower unemployment rates, and a recovering housing market. This made the USD more attractive to investors.
Rising interest rates: The Federal Reserve started raising interest rates in 2015, making the USD more attractive to investors seeking higher yields.
Political uncertainty in Europe: During this period, the Eurozone faced political uncertainty and economic challenges, making the USD a more attractive currency.
Strong demand for safe-haven assets: The USD is considered a safe-haven currency during times of global economic uncertainty, and several events during this period, including the Brexit vote and the US-China trade war, drove investors to seek safety in the USD.