The dollar could be on the cusp of a major reversal

With a strong August US jobs report, we are seeing the dollar gain moderate ground. Is there a case to believe that the dollar could bottom out from here?

US dollar
Source: Bloomberg

The US dollar has experienced a rather shocking 2017 so far, with the dollar index going from a 14-year high in January to a 14-month low in August. In the eight months of 2017, we have only seen gains for the month of February, with the rest showing sharp losses. 

Interestingly, the gains seen throughout 2016 came amid a backdrop of the Federal Reserve (Fed) which only delivered a 0.25% rate hike for the year, despite predictions of 1.10% rate rise over 2016. This year we are seeing the Fed deliver, yet this seems to be overshadowed by an increasingly hawkish stance from the likes of the Bank of England (BoE) and European Central Bank (ECB), coupled with a slipping timeline for Fed rate hikes.      

However, with inflation in both the UK and mainland Europe abating, there is an argument that we will see a shift back into the dollar. Crucially, we can see that the dollar index is back at an absolutely critical support level, with the 2005 high of 9253. That support zone looks as good a place as any to watch for a bullish reversal. 

US dollar basket monthly chart

It is worth noting that EUR/USD makes up the bulk of the dollar index, and this is where we should look for any signs of a reversal. The monthly chart shows the recent rally out of a triple bottom, rising into the key $1.1876 resistance level. This coincides with the 50-month simple moving average (SMA). 

Monthly EUR/USD CHART

Today’s US jobs report has certainly helped turn things around a little bit, with the price falling out of its rising channel formation. An hourly close below $1.1830 would point towards a possible week of downside to come.

Four-hour EUR/USD chart

Ultimately, we have a highly extended bearish run for the dollar, set within a period of monetary tightening. Whilst we have seen a shift in sentiment from the likes of the ECB and BoE, their willingness and speed of tightening is questionable at present. With the jobs report pointing towards a case for tightening in the fourth quarter (Q4), there is a good chance we will see the markets move back in favour of the greenback in the coming weeks and months. 

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