How long can the Dollar avoid critical breakdown?

  • By Author

  • February 5, 2019
  • 12:49 am BST

Last week The DXY Dollar Index traded significantly at the low end of its rising channel and 200-day SMA and many CFD traders who are looking for opportunities are asking themselves what is likely to happen next. Event risk and news headlines are both being looked at closely as volatility could just be around the corner on a scale that might be advantageous to forex traders looking for price fluctuations ideal for contract for difference trades.

With technical analysis such an important tool in dollar-based trading, or come to that any currency whether fiat or crypto, the forecasts from charting actually suggest that the outlook for the US Dollar is currently bearish. with that in mind, many traders are now wondering how long the greenback can avoid a critical breakdown.

Chart patterns

The support that the DXY Dollar Index held last week is significant because simple chart patterns are pointing towards a situation whereby a ‘self-fulfilling prophecy’ factor could become very influential. The combination of trendline support, which actually began back in May 2108 when there were significant lows, and the present 200-day moving average points towards a strong joining together of high profile measures.

Even so, technical data never works of itself in a vacuum and is subject to the overall environments that move trades forward. this means that as long as there is no speculative impulse that pushes a bear market for the dollar forward in something of a rush, support could hold well. However, headline level events that provide an extra risk for short-term volatility could give those CFD traders who utilize a news-based strategy an edge in the coming weeks as major stories continue to evolve and circumstances are open to change.

Indexes

Near term support or resistance for the dollar moving forward makeup only part of the overall picture for working out which direction the market is likely to take. Restriction in daily charts from pairs such as EURUSD and the Dollar indexes themselves are evident but charts providing data over higher time frames may give a slightly different overview to be factored in.

Over the past nine months, the DXY has actually moved gently along in a trend that could be described as being generally bullish although that has featured very little in the way of consistency. Of course, this has made it a fertile ground for CFD forex traders whose whole aim is to find price changes over short term periods which can be somewhat predicted in their nature by trending in longer terms. The ability to take a position having been given insight by data lies at the heart of many successful CFD trades.

In terms of statistical evaluation of the DXY with a reference to history the 4-week average true range, which is equivalent to one trading month, is at its lowest point since late April 2018. This was the point at which the dollar began a hike of nearly 6% over a period of just a month. With this in mind, it is worth noting that over the past 12 weeks its range has been the most restrictive since 2014.

Quiet period

A quiet market environment that is based on a well-established range for any asset is, by received wisdom, likely to hold unless something happens to alter the course that is both unexpected and difficult to ignore. This factor basically works on a principle of collective speculative sentiment and means that traders will generally themselves hold a steady state until moved to action by some outside force.

A technical break can occur due to a simple increase in speculative trader actions and then this sudden momentum snowballs and becomes the self-fulfilling prophecy. However, there usually needs to be a far stronger impetus that chart-based data in order for this situation to arise and that is where event risk becomes such an important element.

As with most currencies, the Dollar doesn’t always determine its own fate as international macro-economic moves can cause shifts that are both strong, swift and unexpected. By the same token, fiat currency can become a safe haven in certain volatile situations when markets essentially collapse.

How long is long?

As price movements are the bread and butter of contract for difference trades, a certain amount of volatility is, of course, welcome and again this is why forex markets are so popular with many CFD traders. The FX market will always be subject to shifting risk trends that can be influenced by many different factors, including of course governmental monetary policy and overall financial market stability.

The Dollar is like any other fiat currency in this respect and that is why risk events could be the determining factor as to how long it can hold out against a breakdown. The ongoing trade war between the U.S. and China, the two largest economies in the world, has been having ramifications on stock markets for at least a year. Its full effects have perhaps yet to be seen on forex markets, and again this is an area in which a news strategy can be as helpful as technical analysis when it comes to deciding on a CFD position to take.

Breakdown

Of course, ‘breakdown’ is an emotive word taken outside of an analytical context, but for many traders, there are concerns that volatility could increase dramatically during 2019. Although data may point towards a relatively steady state, an atmosphere of ‘wait and see’ has been building across many different markets over the past few months, not just on currency exchanges but on stocks, commodities and others too.

For those looking at trades involving the Dollar this means that the weeks and months ahead could make for exciting times offering plenty of potential for CFD trade success, but if that is based on the greenback having a bad run it could have wide-ranging fallout on many other markets too.