Q4 look ahead: will the dollar strength continue?

As we move into Q4, it is worthwhile taking a look at some key FX pairs from a wider perspective to see what the final three months of the year could have in store.

Dollar bills
Source: Bloomberg

The dollar has seen a rather topsy-turvy 2016 so far, with the first four months characterised by dollar weakness, followed up by a recovery in the following five months. With the dollar typically the most commonly traded currency, it is worth noting how things look for the greenback before turning to some of the most commonly traded currency pairs for Q4.

Dollar index

Since bottoming out in May, the dollar index has been in its ascendancy. Despite a slowdown in this resurgence, we have not yet seen anything to say this rally is over.

The gradual incline seen over recent month’s means we have seen deep pullbacks, with both the June and August lows coming into 76.4% retracements before moving higher once more. Given the rally into this pattern, this range is expected to remain in place until we see a breakout.

Thus, as long as we do not see an hourly close below 94.11, there is reason to believe the dollar will continue to perform over the coming months. 

EUR/USD

With EUR/USD constituting just under 60% of the dollar index, there is no surprise this chart looks like the inverse of the one above. On this occasion, we are seeing an ‘M’ shape, which points towards another move down to the $1.0550 region in the coming months. We would need to see a daily close above $1.1428 to negate this recent downward trending market.

GBP/USD

This pair has obviously suffered the most this year, with price rotating within a symmetrical triangle in the aftermath of June’s referendum. Given the pattern coming into this consolidation, the exit looks likely to be towards the downside.

That being said, with hesitation at the Federal Reserve and UK data looking relatively respectful, we may remain in this consolidation phase for the time being.

Clearly we are seeing some respect of trendline support this week and as such, the pattern is expected to hold until it does no more. This means that while a bearish exit is expected, we would need a daily close below $1.2865 or above $1.3445 to bring a directional signal, following the completion of this pattern.

USD/JPY

This market has been trading in a consolidation phase over the past three to four months, with price having tumbled into an interesting area of support. The monthly chart below highlights the importance of this region of support, with the 1999 low, 2005 low, 50% retracement and a consistent 2014 support level all encompassed within the ¥100.72-101.60 zone.

In fact, this current area represents the only area of consolidation within the 2012-15 rally and as such, it is not surprising we are seeing the selling stall somewhat currently. The wider picture also shows this ¥100.72-101.60 zone represents the central point of a multi-decade descending channel, where a strong break below this level could set us up for another sharp move lower.

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