U.S. Dollar: Expect A Further Decline

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Includes: UDN, USDU, UUP
by: Sandeep Singh Ahluwalia
Summary

The reopening of the government shall cause the U.S. dollar to have a further fall.

The Federal Reserve just provided the bears with some much-needed support.

I am leaning towards the U.S. dollar bears being in the driver's seat.

In my last article on 23rd January, I had highlighted that the U.S. dollar (UUP) is at a crossroad where the probability of the currency having a downward move is rather high. Moreover, I had also highlighted that if the U.S. dollar were to break below the 50% Fibonacci support level, then this would result in the currency having a swift fall until the 100% Fibonacci support level. This belief of mine proved to be true as the currency broke below the 50% Fibonacci support level on 25th January, after which it managed to fall until the 100% Fibonacci support level within three trading sessions. However, I believe the downward move shall now continue as I expect the currency to fall to the range between 127.2% and 161.8% Fibonacci support levels. Hence, to establish the likelihood of this occurring, I shall look at the fundamental news affecting the currency, whilst also analyzing the chart using technical analysis tools.

Fundamental News:

The government shutdown:

In my last article, I had highlighted that the U.S. government shutdown was positive for the U.S. dollar bulls in the short run. The shutdown delayed several economic reports from being released which would have otherwise had some sort of an impact on the Greenback. This assumption of mine proved to be true. I say that because President Trump's announcement that the government will be reopening temporarily may have caused the bears to once again get a grip on the currency. Moreover, I expect the bearish stranglehold to remain as the extent of damage done to the U.S. economy will be exposed gradually. This, in turn, shall ensure that the U.S. dollar gets a constant dose of bearish pressure in the days to come.

Foreign positions:

In my last article, I had highlighted that the unwinding of Japanese positions in U.S. Treasuries would cause a problem for the greenback bulls. The selloff has been applying constant bearish pressure on the greenback which has resulted in the currency having a fall. Moreover, I expect the unwinding of Japanese positions in U.S. Treasuries to continue which shall cause the bearish pressure to be existent for quite some time. The Japanese presently own $2 trillion worth of U.S. Treasuries. Additionally, I expect other investors to also find it more profitable to stay away from the U.S. bond market up until the interest rates are high enough to offset hedging costs.

The Federal Reserve:

In my article on silver, I had highlighted that the Federal Reserve Chair Jerome Powell was showing signs that he would be unable to follow his original laid out plan. I made this assumption as I expected external forces to dictate how the Federal Reserve makes decisions in 2019. This belief of mine proved to be true as a week later, the Federal Reserve Chair practically told the market that the Federal Reserve is at the market's mercy. Moreover, I believe he made this decision as the financial market's tantrum seen in December 2018 was just simply too big to ignore. Thus, due to the extreme dovishness expressed by Mr. Powell in the press conference, I expect the U.S. dollar to have a tumble in the coming days. The Fed has practically been brought to a grinding halt as they try to heed to wishes of the market.

Technical analysis:

Daily chart:

U.S. Dollar Index Daily Chart

The currency's daily chart indicates that the U.S. dollar is all set for a bearish continuation as it has fallen until the 100% Fibonacci support level. Moreover, the probability of a further bearish fall is rather high as the currency has formed a sizable bearish candle at the 100% Fibonacci support level. This clearly indicates to traders that the support level is about to break soon. Furthermore, the greenback's lagging line has broken below the Ichimoku cloud pattern which indicates to investors that the U.S. dollar is all set for a further decline. However, before the bearish fall commences, I expect a slight sideways pattern to form which will basically act as a bull trap. I say this because the short-term RSI reading has reached the 2-mark which indicates that a bull trap will form that will help gobble up some investors.

On the price target front, I expect the greenback to fall to the range between 127.2% and 161.8% Fibonacci support levels. The 127.2% Fibonacci support level is at 94.707, whilst, the 161.8% Fibonacci support level is at 94.329. However, I do not expect the greenback to fall beyond the 161.8% Fibonacci support level as this is a long-term candle support zone.

The big picture:

Overall, the U.S. dollar is presently providing traders with several signs that the downward move has not come to an end. However, I expect the U.S. dollar to trade sideways for a few days after which it shall continue its price descent. This is because technicals indicate to investors that such a pattern is being formed. Nevertheless, whichever way you do decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.