The American dollar has moved in two to three month-cycles since the end of 2020. November and December were bearish. Then we had three months of a proper bullish ride. April and May were negative again. On the other hand, June and the first half of July were positive for the American currency. It seems that August and actually the second half of July are the start of a new bearish wave, which most probably will last at least for a few weeks.
The negative story for the dollar is supported from both sides of the financial instruments’ analysis: the fundamental and technical sides. First, we’ll focus on the fundamentals, and later, we will support that with technical analysis.
The dollar started to lose traction at the end of July as the Federal Reserve made clear that they’re in no hurry to tighten policy, meaning they’re not planning to raise interest rates anytime soon. They will eventually do it, but they’ll take their time with that.
To clarify, rising rates are generally positive for currencies causing appreciation and lowering rates and, in general, causing the currency to lose its value. Market participants live with expectations and those expectations were quite different. That’s why, ahead of the Fed statement, the dollar got stronger, which indicated hopes for a more hawkish stance from policymakers. That did not happen, so expectations had to be verified.
As for the fundamentals, that’s not the end of the story. We had the Fed’s announcement, but now we’re getting ready for the Non-Farm Payroll, which will be published on Friday. The Non-Farm Payroll is the US’s most important job report, showing how many jobs were created in the US economy. The July report is expected to show us the number of 925,000 jobs, which would be a significant improvement from the prior report from June, which printed 850,000 jobs.
In theory, a stronger than expected report, could trigger the dollar to strengthen. Only in theory though because the last few months and also the post-2008 recovery showed us that it does not have to be that way. Very often good news is good news, but bad news can be good news too. It depends on various factors and goes way beyond the scope of this article.
Now we move on to the technical side of the dollar. The setup here is definitely negative. The price created a false breakout from the inverse head and shoulders. In other words: The price had a setup, which was positive for the buyers, but they wasted this opportunity and the price collapsed. If you don’t use a chance like that, it means that you’re weak and the other side of the market (sellers) is taking control. All that together draws a negative scenario for the American dollar over the next few weeks.
Tomasz Wisniewski, director of research and education, Axiory Intelligence.
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