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Is US Dollar Strength Ending? FX Market Analysis 12/14/15

Is US Dollar Strength Waning?

First of all its good to be back! I was on vacation last week in Grand Cayman and I’m back to start the week! Anyway, after looking over some longer term data this weekend I have strong case to make for a transition away from USD strength. Understand this, I’M NOT A LONG TERM TRADER AND I WILL NOT BE PLACING TRADES FROM THIS OPINION. Additionally it is just an opinion at this point, and the price action needs to confirm it. Fundamentally currencies are either weakening or strengthening based on their current rate cycle. For the last year the market has been pushing towards US Dollar strength due to the potential for a rate hike. More and more economist are saying even if they do hike rates it will simply be 25 basis points and they would likely have to move it right back down to zero on any signs of the economy stalling. Therefore the last year and a half of US Dollar strength has been in some ways on the back of a false idea of policy tightening that is simply not going to happen.

Reason number two is the current trend is COT data (Commitment of Traders). COT data is heavily flawed in my opinion and as I always say it is not something you should solely base your trades from. It does however show sentiment shift over longer periods of time in the market, and it can showing underlying buying or selling pressure in the market. Since the middle of June 2015 we have seen the Asset class moving towards a net flat position in the Euro, thus indicating the potential for further strength. The reason I point this out is we have not been ‘net zero’ since March 2013.

At this point though the Pound is still showing weakness which is conflicting. Remember price is the true confirmation of opinion. What I say means nothing if price starts to disagree with it. What type of actionable information can you then take away from this? I have 2 levels that I’m going to term as short term “lines in the sand”. If these levels break and hold to the downside then I would hold off on any USD short bias. On the EUR/USD the level is 1.0800 and on the GBP/USD the 1.5100 level is my key point. Should the price slip and hold below those levels then further downside in both pairs becomes a stronger possibility.

Euro COT Report

The final key factor to keep in mind the the US Dollar Index. As I pointed out in the December 4th 2015 market forecast, we had a major stop run of the previous daily highs. This stop run gathered traction on somewhat “bullish” Euro news and fueled the US Dollar weakness we have seen over the last few weeks. Obviously a retest and break of the previous highs is the key point to look for. Even if the US Dollar index is going to continue to fall, you will likely see a short term rally to the upside. If a rally gets heavily rejected and sets new short term lows then the US Dollar short bias gains a bit more traction.

At the end of the day though, this Wednesday could shift everything that has been stated to this point. If Yellen comes out with a super hawkish tone and says something like “this will be the first rate hike of a tightening cycle” then the Dollar will go crazy again. Obviously the comment will be much more subtle than that if she were to make it, but you get the point. If she doesn’t hike this time around then this might be one of those rare opportunities where chasing a EUR/USD or GBP/USD long will have a high probability of success. Either way Wednesday is likely to bring the fireworks.

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EUR/USD Remains Strong

Since the spike at the beginning of the month I have continued to trade the manipulation points to both sides of the price. I feel like keeping directional bias open has continued to be the best option. This week is going to be interesting and I don’t think we should expect a strong push before Wednesday. While its possible I just don’t think the market will commit to a bias until the Fed release later this week. As the liquidity drys up going into the Christmas holiday I will go to the largest listed levels only. If the market has lower liquidity in general then trading from larger levels is the best way to be sure your entering quality setups.

EUR/USD Chart - December 14th 2015

Continuing To Trade GBP/USD Range

I will be trading the Pound the same way I’m trading the Euro. Much like the Euro, I don’t have a short term market cycle bias. If you look at the GBP/USD on the daily chart you will notice we are in a bit of a falling channel. At this point we are nearing the high of that range which does present an event area. If that begins to break then it supports the potential for US Dollar weakness I mentioned earlier. The largest driver for the GBP/USD will be the Fed on Wednesday, the same as it is with the EUR/USD.

GBP/USD Chart - December 14th 2015

Forex News For December 14th 2015

EU President Draghi Speaks 6:00 AM Eastern: While this good be a market mover, if I was in a trade I would more than likely hold a trade going into this news. This is not a monetary policy speech and therefore not as likely to be a huge market mover.



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