Market Watch – Dollar Index Forecast 7-12th September 2014

How do we trade the dollar next week? 

I think the coming week will be an interesting one for the dollar. This week we paved the way for a correction after 7 consecutive weeks of dollar rally. As shown below, such rallies are often followed by sharp corrections and I expect this time won’t be different.

Moreover, this correction is not only expected from a technical point of view, but the fundamentals are also favoring such a move. In fact, after a series of excellent economic data from the US, on friday we had a report showing that the job conditions in US is still not what the FED is expecting. Fewer jobs than expected were added into the economy and moreover the wage growth and quality of jobs was disappointing. This gives some arguments for the dovish members of the FED that now have an excuse to postpone eventual rate hikes. Furthermore, again on friday a ceasefire was declared in Ukraine. However, the market did not react to that news that was instead received with skepticism (given that the previous ceasefire in Ukraine did not last long). Therefore, next week it will be crucial to see if the ceasefire will hold. The deterioration of the situation in Ukraine coincided with a strong dollar bid this summer, hence a de-escalation would favor dollar sell positions due to lower market sensibility to risk. A good website where to follow the events in Ukraine is RT.com.

However, before entering any dollar-short trade I will be looking for objective signals and only then short positions will be triggered. For example, a good indicator is the RSI, as we can see below, the RSI for the dollar shows that we approached the resistance and that further appreciations of the dollar would lead us into overbought territory.

What I am waiting for is a break of this trendline that will signal the possibility to enter new dollar-short positions. Because all these events occurred late on friday there was not enough pressure in the market to start reversals and corrections and many traders prefer to wait for the weekend to observe the follow up of the events in Ukraine and some other need to realize that the disappointing job numbers we have seen on friday are the result of an economy that is still far from healthy. 

 As shown in the chart above, the dollar-rally seems to be loosing steam. In fact, the resistance held firm and cause a slight bounce in the dollar. However, until we don’t see clear signals of reversal I would recommend to be cautious.

Further observations and opinion can be found on my latest video:

Good luck trading!!