Skip to content

CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please consider our Risk Disclosure Notice and ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please consider our Risk Disclosure Notice and ensure that you fully understand the risks involved.

US dollar long-term techs: is Q4 a quarter for reversal?

The US dollar has continued to gain through the first three quarters of 2019 trade, but can buyers continue to push with a series of risks flaring?

US dollar long-term techs Source: Bloomberg

US dollar: where do we stand?

It’s been a strange year for the US dollar. Even though the Federal Reserve (Fed) has stopped hiking rates and started to cut, the US currency has continued to gain, even though the data hasn’t been hugely strong. Behind the move is a series of events outside of the US, as central banks around the world adopt dovish postures that, frankly, outpace the Fed’s softening so far in 2019.

At each turn, the Fed has attempted to strike a tone of patient stability, waiting for oncoming data before committing to more aggressive cuts; but, at this point, that lack of clarity has simply left market participants to their own devices, and the dollar has continued to gain into into fourth quarter (Q4) trade as the ‘cleanest shirt in the dirty laundry’.

Coming into Q4, the greenback is trading at a fresh two-year high, capping off three consecutive months of gains in Q3. This even with the Fed having cut rates twice – the first such moves since the 2008 Recession.

US dollar monthly price chart Source: DailyFX
US dollar monthly price chart Source: DailyFX

The downside of a strong dollar

If current matters around the US dollar were as simple as following monetary policy, topside would remain of interest; but on a technical basis, another item has shown up and this syncs fairly well with the current fundamental backdrop that exists outside of the monetary scope.

President Donald Trump has opined, numerous times, on the disadvantages of a strong currency. Namely, it hits US exporters and provides a hindrance for growth; a challenge that becomes very difficult to manage while the country is in the midst of some rather acrimonious discussions on trade with some very large and key trading partners. This, combined with the continued tightening in US rates, and a general slowdown in the US economy.

Given that another presidential election is now just 13 months away, this is a problem that the President would likely want to head off, so each time the greenback has jumped to a fresh high, as we saw on the first trading day of Q4, a his Twitter account will opine on the matter, often in a negative light. This is precisely what happened yesterday as the account launched into a diatribe: 'As I predicted, Jay Powell and the Federal Reserve have allowed the dollar to get so strong... that our manufacturers are being negatively affected. Fed rate too high. They are their own worst enemies.'

So, the question remains – can the Fed remain undeterred by this pressure? As this theme has brewed throughout 2019, a technical formation has built in the dollar that highlights the potenital for a bearish reversal. Buyers have continued to shy away around the establishment of fresh highs while remaining very active and bullish near lows. This has led to the build-up of a rising wedge pattern, which will often be approached for bearish reversals.

US dollar weekly price chart Source: DailyFX
US dollar weekly price chart Source: DailyFX

Asymmetric support and resistance lead the way

While calling or looking for reversals is a challenge, given that the expectation is for the status quo to completely shift, the current backdrop to the US dollar presents a scenario that could be more attractive for weakness than strength and this can remain true from both technical and fundamental vantage points.

On the fundamental side, there’s been a clear statement of bias from the US President who holds the harnesses of fiscal policy and, on the monetary front, the Fed has a lot of room to make policy softer. While Jay Powell, Fed Chairman, has rebuked the prospect of negative rates, the potential for Quantitative Easing (QE) does remain, particularly if liquidity concerns remain around the currency. Furthermore, if the bank does move deeper into a rate-cutting cycle, given the nine prior rate hikes from 2015-2018, there’s simply more room for it to go compared with other key central banks, like the Bank of Japan (BoJ) or the European Central Bank (ECB).

From a technical perspective, proximity to longer-term resistance could make bullish continuation scenarios a challenge, while bearish reversals could offer relatively tight risk controls with considerable target potential. Collectively, this produces a potentially bearish scenario for the greenback as 2019 winds down and the election year of 2020 draws closer.

US dollar daily price chart Source: DailyFX
US dollar daily price chart Source: DailyFX

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

Start trading forex today

Find opportunity on the world’s most-traded – and most-volatile – financial market

  • Trade spreads from just 0.6 points on EUR/USD
  • Analyse with clear, fast charts
  • Speculate wherever you are with our intuitive mobile apps

See an FX opportunity?

Try a risk-free trade in your demo account, and see whether you’re onto something.

  • Log in to your demo
  • Take your position
  • See whether your hunch pays off

See an FX opportunity?

Don’t miss your chance – upgrade to a live account to take advantage.

  • Get spreads from just 0.6 points on popular pairs
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform

See an FX opportunity?

Don’t miss your chance. Log in to take your position.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.