Dollar Graphic

Dollar's strength comes from unexpected quarters

15 Aug 2018 05:11 PM

By Gaurav Kashyap

Risk appetite was hit hard this past week as a new round of US led sanctions on Turkey spooked global markets.

After several months of finding staunch resistance in the channel between 95 and 95.50, the dollar index now finds itself comfortably trading above 96 levels. While the move higher has been much delayed it is curious that it wasn’t the actions of the US Federal Open Market Commitee or the ongoing trade wars with China that sparked this move higher.

This bodes well for those dollar longs who have been waiting for months for a break of that key level at 95 which is now seen as a strong support level.

Off the back of these developments, the yen continued strengthening as a risk off currency and the dollar strength has also seen Gold move below $1,200 levels on the Dubai Gold & Commodities Exchange (DGCX).

While our downside targets given in my last publication were fulfilled at $1,204, I maintain my bearish view in the yellow metal and expect to see a strong test of $1,180 levels in the next two weeks, while upside resistance will hold at $1,220 levels in the weeks ahead.

The recent moves in the US dollar index will promise further downsides in currencies such as EUR/USD and GBP/USD which were also hit hard in trading last week.

DGCX’s EUR/USD contract has sunk to 9 month lows at 1.14 levels and more weakness is expected to take the cross down to test 1.11 levels within the next few weeks.

The economic calendar takes a breather this week following back to back weeks of high level releases. It’s particular quiet on the North American calendar with all the key releases coming from the UK this week.

UK inflation due out on Tuesday will be a key driver in GBP pricing following the hike in interest rates this month. It was surprising to see the Bank of England hike rates at this past meeting, and perhaps even more surprising the the unanimous 9-0 vote to hike rates. Despite the announcement the pound sold off in the hours following the announcement which signifies that despite the most recent rate hike sterling is primed for more downsides.

These data points will form only a small part of pound pricing with the breakdown of ongoing Brexit talks being the main driver of sterling volatility. Amid these developments, the pound has fallen to uncharted territory this year – at the time of writing Cable has sunk to 14 month lows.

With the pound currently trading above 1.2750 levels against the Greenback on DGCX, expect to see a move downwards towards 1.23 levels in the week ahead.

Judging by the recent geopolitical events it is fairly safe to say that global financial markets are entering a period of uncertainty at best.

With the aforementioned sanctions and trade war rhetoric, the risk off environment will thrive through the third quarter of 2018. It would thus prove prudent to continue to explore long opportunities in the US dollar and the Japanese yen.

Expect to see continued downsides in crosses such as EUR/JPY and GBP/JPY while upsides will continue to also prevail in commodity currencies such as the U*S dollar versus the Canadian dollar.

And with no major data releases due out on the economic calendar next week, these issues will continue to dictate investor sentiment.

Gaurav Kashyap is a market strategist at Equiti Global Markets

The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti.

Tags: USD

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