Last week the entire financial community focused on the ECB and its message. While the central bank kept the monetary conditions unchanged, the attention was on the dollar index.
At the start of September, the dollar index made a new low. Because the Euro is more than half of the index’s weight, the ECB’s decision is a key driver for the dollar index too.
The Fed delivered one of the most aggressive easing programs in the world as a response to the coronavirus pandemic. Coupled with the fiscal measures in the United States, the easing outpaced anything else seen in the rest of the world.
But at the same time as the Fed eased the monetary policy, the liquidity impulse actually turned negative during the summer months. The problem comes from the US Treasury that issues more debt than the Fed is able to buy. Therefore, in short to medium term, the dollar index may rebound.
Even though the negative liquidity impulse is seen as temporary, it might be enough to send the USD higher across the board. However, don’t expect a strong move until the US elections are behind, and a new presidential cycle starts.
From a technical perspective, the dollar index broke higher from a falling channel. Moreover, the index broke the series of lower lows and lower highs, characteristic of a bearish trend.
If the recent break represents a turn in the dollar index, expect the greenback to gain across the dashboard, and especially against the Euro. We may even see a potential inverse head and shoulders pattern forming at the lows, with the index currently consolidating in the right shoulder.
To trade it, bulls need to measure the distance from the current price level to the lowest point in the head. Next, to project it higher to find the minimum distance, the market should travel, while having a stop-loss at the lows.
