It is going to be a big week for the markets this one, especially towards the end of it. Among other things, we will have the UK’s general elections, the European Central Bank's latest policy decision and former FBI Director James Comey’s testimony all to look forward to on Thursday. Chinese trade figures, a rate decision by the RBA and Canadian employment figures are among the week’s other key events.
The outcome of the UK’s election will be especially important for the pound. A win for Prime Minister Theresa May is seen as pound-positive because of her Conservative party being pro-business. She is widely expected to win, and most polls still have her in the lead even if Labour’s Jeremy Corbyn has managed to narrow the gap quite remarkably in recent times. But polls can be wrong and if Theresa May does not secure an outright majority then things may get complicated and the pound could suffer.
As far as the ECB is concerned, the focus will be on President Mario Draghi and in particular on any potential hints about tapering of QE earlier than planned. Thanks to the improvement in economic data in the Eurozone, calls for tighter monetary conditions, especially from several German officials, have increased. But will Draghi and co. respond? The icing on the cake will be the former FBI Director James Comey’s testimony before Congress on Thursday. If he comes up with evidence that Donald Trump pressured him to close the investigation on the national security adviser, Michael Flynn, then hell could break loose in the United States.
Thus, given the potential for sharp moves in the likes of the British Pound/U.S. dollar (GBP/USD) currency pair and EUR/USD, and possibly the USD/JPY, the Dollar Index could be in for a rollercoaster ride, especially as we also have the Fed meeting next week to take into account as well.
A dovish hike springs to mind following the release of what was an abysmal jobs report on Friday, not to mention the downward revisions to the previous months’ figures. The Fed has talked it up too much not to raise interest rates this month, for its credibility will be on the line. But it will probably accompany the potential rate rise with dovish commentary regarding the future path of interest rates. This could potentially keep the dollar under pressure.
With all these risk events upon us, how could one possibly trade the U.S. dollar? Well quite simply, actually, by taking it from on level to the next and the reassess. The Dollar Index does certainly point lower, at least from a technical perspective anyway. The breakdown of several key support levels in recent times means the DXY has suffered a lot of technical damage and as such the path of least resistance remains to the downside until the chart says otherwise. The weakness has been confirmed by the 50-day moving average crossing below the 200 in a technical development called a “death cross.” On its own, a death cross does not mean anything, but with price action clearly being bearish it does underscore market participants’ net bearish view. The next bearish objective is at 95.90, the low before the onset of the “Trump rally” back in November.