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US Dollar Index: How Long The Retracement May Last ?

US Dollar Index: How Long The Retracement May Last ?

For the past few weeks, the US Dollar Index failed to break above 103.0 resistance area for more than three weeks, leading to a short-term correction to the downside, which seems to perfectly technical for the time being. However, the US Dollar and the global markets are basically under Trump’s threat, through his strong comments when it comes to politics and the economy.

US Dollar Fundamentals

Last week, the US figures were mixed, especially the ones on Friday. The Retail Sales came in short on expectations; the MoM Core Retail Sales posted its fourth monthly slowing down in a row, despite the fact that the Retail Sales came in slightly better than expected. Moreover, the PPI increased by 0.3%, which is slightly higher than expected, while the Core PPI slowed to 0.2%. In both cases, the Core data have slowed down notably and far away from the market expectations.

These figures were the catalyst for Friday’s sell-off. Will it continue? It depends on this week’s developments as we wait for many economic releases and events, which set to have a notable impact on the markets.

US Dollar Technical Outlook

Looking at the chart above, 103.30 represents a solid resistance since 15th of December, which led to the recent decline all the way back to 100.70 on Thursday of last week. The Technical Indicators were heavily overbought since the Dollar Index have been rising continuously without any reasonable retracement since May of last year.

US Dollar Index Jan-2017

Does This Mean More Downside?

The short answer is no, since September until today, the index managed to retrace for few days only before spiking for another high. Will it be the same this time? I believe it won't, as the Index is trading now below the December top, with a clear weekly close below that support, which now turns into resistance and should be watched very carefully over the coming days.

How Long The Retracement May Last

From a technical point of view, the short-term retracement may continue if the index failed to rebound above 101.80. Yet, a deeper decline below 101.0 is needed to clear the way for further declines all the way back to the 100.0 barrier, as 101.0 represents the 61.8% Fibo of the latest rally since Mid-December until today. If so, the next level to watch would be the 100.0 barrier, where buyers are likely to protect that solid support.

Brexit Risk Statement

In the next few days, the whole world will be watching the long awaited press conference for the UK Prime Minister Theresa May who’s due to speak about Brexit in London. There are many signs and reports saying that the UK will announce that they are prepared to accept hard Brexit, which is one of the reasons behind today’s sharp decline in global equities and GBP since the beginning of the Asian session. If the UK to accept hard Brexit, traders are likely to rush back into the US Dollar, as Theresa May statement might be the catalyst for protecting 100.0 level in the US Dollar Index.

ECB Risk

Despite the UK PM press conference, there is another risk to keep an eye on during this week, which is the ECB decision. Many expect the ECB to keep the current policy unchanged, and we also share the same view. However, inflation data and the European economic releases have improved over the past few months, which might force the ECB to hint for an earlier tapering than planned in April, which would be very positive for the Euro, while the 100.0 barrier for the US Dollar might be at risk to be taken out.

by Nour Eldeen Al-Hammoury, Orbex

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.

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