Is This the End of US Dollar Strength?

Is This the End of US Dollar Strength?


News out of the UK sent the US Dollar lower against the Pound, as PM May called for an early June election. While it’s hard to believe that such an event would be the catalyst for buyers to emerge in the Pound, the reaction across the US Dollar basket resembled more that of short covering than a true reversal for the Dixie. While there is no doubt that the upcoming fruition of the “Brexit” process is a major event for the European theater and all their global trading partners, this is anything but breaking news for most traders. The consequences or benefits of such a secession have likely been priced into the Pound, and today resembled a classic stop driven, profit taking, and potentially terminal rally for most the majors against the US Dollar.

Both June ‘17 Euro and June ‘17 Pound futures participated in the US Dollar slide, closing 86 pips and 276 pips higher respectively. Impressive as the Pounds rally was, it’s important to consider that while below 1.3500, the Pound is technically below multi-decade lows that held as support, which failed during the “Brexit” breakdown. The 1.2900 handle for the Pound also represents a major Fibonacci confluence zone, where both a 50% fib retracement and a 100% equal legs extension form resistance. While below the 1.300 handle, a broken support zone formed buy 2016’s summer range lows, traders will likely eye for at least another test of the 1.20 handle lows and potentially a run towards 1.15 technical downside extension targets.

The Euro’s rally, on the other hand, was far less impressive, and rallied the market right into the 50% fib retracement of March highs to April lows. Continuation lower from this area, while remaining below the 1.0830 61.8% fib, suggests the Euro will retest and potentially break the supportive trend line drawn against 2017 lows, which bounced the Euro higher off the 1.0600 handle earlier this month. As the say, “Trend lines are meant to be broken” and another test lower might just be be the fuel for a “hair-on-fire” slide towards 1.00-1.01 technical downside extension targets.

Of course, there is always the chance that the US Dollar will continue to weaken, and both the Euro and Pound break through these key resistance levels. Such an event would, in my opinion, be a strong indication of a more substantial trend reversal for the US Dollar, the Euro, and the Pound. Until that happens however, I expect this short term US Dollar weakness to be faded, and for trade to resume its now multi-year trend of US Dollar strength.

British Pound Currency Futures – Continuous Contract

Euro Currency Futures – Continuous Contract