Dollar Bulls are Getting Slaughtered, The Aggressive Decline Continues
Eric Furstenberg • 4 min read
These last few days we have seen the USD come under a lot of pressure. Since the GDP disappointment out of the US last week Friday, its currency has been struggling to find any support whatsoever. Perhaps investors and speculators are trying to pre-position themselves for the Non-farm Payrolls numbers on Friday, or perhaps hopes of near term interest rate hikes out of the US are diminishing. Whatever it might be, there is money to be made when the market makes large moves. Let’s look at a few instruments:
Major Indices: USDOLLAR Index
USDollar Index Daily Chart
This index, as mentioned in a previous article, is a composite of the USD against four currencies namely the GBP, the JPY, the EUR, and the AUD. I like looking at it from time to time, because it makes it possible to quickly gauge the general strength of the USD, which is the most traded currency in the world.
As you can see in the chart above, there has been competition to sell the USD, and the price has impulsively declined from the recent highs. Next, let’s look at Cable:
GBP/USD Daily Chart
The pound recorded a sturdy performance yesterday, gaining about 182 pips against the dollar. I have heard that institutional players have been buying a lot of pounds recently, which is quite interesting considering the recent onslaughts of various political and economic factors on the Sterling. This week we have very important economic news out of the region on Thursday that could entail a lot of volatility. This includes a rate decision of the BOE, where they are expected to cut rates by 25 basis points to 0.25%.
At the moment I like the long side of the GBP/USD, and I remain a cautious buyer. Yesterday’s daily candle closed close to the highs, indicating that the bulls remained in control of the market until the end of the trading day. Also, we had a firm daily close above the 20 EMA (blue moving average) which also tells me that the bears are having a tough time defending their territory.
The retail sentiment is bearish on this pair at the moment, which also supports the “long idea’’. (Retail sentiment is used as a contrarian indicator to price). Let’s see what the price action looks like on an hourly chart:
GBP/USD Hourly Chart
As I have mentioned in previous articles, I do not like to chase the market, but I prefer to wait for corrections which offer a better risk to reward ratio to enter at. If you examine the chart above you will notice that price is currently relatively far above the 20 EMA. To enter a long trade at this level would not be wise seeing that we are getting into the trade when the price is relatively overbought already. If a trader waits for the price to retrace to for example the 20 EMA on the hourly chart, he or she can enter the market with a much tighter stop, thus increasing their chances of success.
Just remember that we might get extremely volatile market conditions for the pound later this week, so be sure to mitigate your risk when trading this currency.
Other major pairs of interest
EUR/USD Daily Chart
As you might have noticed, the Euro has gathered some serious bullish momentum these last few days. Retail sentiment is quite bearish on this pair which would suggest that further gains might be on the horizon. However, the bullish move has become quite extended, and there is an imminent risk that we might see a correction on this pair soon. Once again, it might be prudent to wait for a correction to appear first before attempting to enter long. Look at what the recent bounce looks like on a 4-hour chart:
EUR/USD 4 Hour Chart
Then, of course, we saw some interesting price action on the AUD/USD yesterday. The RBA cut their interest rate by 25 basis points from 1.75% to 1.5%. The initial market reaction was bearish, nevertheless, the smart traders overpowered the hasty uninformed sellers and soon after the release and the RBA statement, the bears were trapped on the wrong side of the market.
This is what I wrote in yesterday’s trading plan, a few hours before the RBA event: “Be prudent enough not to blindly sell the Aussie if they decide to cut the rate, as this does not necessarily mean that the currency will decline. Sometimes market participants price in future events, rendering them largely ineffective by the time they actually take place.” Look at the 15-minute chart below:
AUD/USD 15 Minute Chart
I remain constructive on this pair for now, especially with the prevalent USD weakness. The 20 EMA (daily data source) is still supporting price very well, and what happened today serves as a warning that the AUD bulls are definitely still dominating the game. Look at the daily chart below:
AUD/USD Daily Chart
USD/JPY Daily Chart
Anyone can clearly see that the bears are firmly in control. This is aggressive selling, the type of instrument you want to be trading right now. The retail sentiment is enormously extreme, with 4.53 traders long for every short trader. This points to further losses in the exchange rate. I will surely be on the lookout for bounces to sell. Perhaps a pullback to the 20 EMA on a one hour chart, or perhaps on a 4-hour chart. Maybe use other signals, like a pinbar rejection off of a resistance zone, etc. Take a look at the hourly chart below:
USD/JPY Hourly Chart
We do not have a lot of important economic data today. Perhaps the most important being the US ISM services numbers at 12:00 GMT. The more important data is tomorrow (BOE) and on Friday (NFP’s).
Best of luck with your trading!