Between the major Fibonacci rejection at the 61.8% retracement, false breakout of highs, and majorly divergent RSI, we had the technical makeup of a reversal the beginning of 2017.
And the fundamental backdrop seemed right at the time as well. To name a few:
- We had a new administration (US) that had a very messy transition into the White House months before, which could have clued you in on how difficult the current administration would have it pushing legislative agendas through in 2017.
- We were at a major crossroads with other central banks as they had been following behind the Fed in tightening measures and were sure to become “less accommodative” in policy. As the investing community has seen the Fed already raising rates, it was only a matter of time other major central banks would follow suit.
- Risk appetite continued to stay strong all of 2017, allowing investors to avoid the US Dollar investing into other assets as yields have been very low globally throughout the year.
Of course, you could tack on other reasons, which may be more/less important, but I’m sure you would agree we are not here to give you a history lesson, but look ahead into 2018.
So, what’s really changing in 2018? In my opinion, not a lot. However, yields are starting to rise globally, and this will put pressure on other central banks to continue to work in a “tighter fiscal policy” throughout the year. This could also introduce other risks like falling bond prices and potentially a give the equity markets a headwind as yields rise as well. We still feel that the Trump administration will have its hands full as they focus on trade and infrastructure plans (we saw how well tax legislation went considering everyone was in agreement changes needed to be made, whether or not you and I agreed with them). And as far as central banks, we are going to see a lot of back and fourth on expectations of “how far and how fast” rates will go up when talking about ___________ central bank.
One of the other things we should discuss is that we entered 2018 with the largest speculative long interest of the EUR. EVER! Usually, that doesn’t end well. So, we may see a large reversal in the EURUSD (that is bullish US Dollars) near term as the speculative market usually has it wrong.
So, in a nutshell, this year will be a lot messier with “price action” in the FX market and the direction of the US Dollar. Do I feel the US Dollar will continue to trend lower still? Yes I do. Will it be a straight line? I doubt it. My long term charts look like this:
But in all actuality, it will end up something like this:
The bottom line: As a trader, I welcome some needed volatility. Volatility for us give a trader an opportunity to “mistime” an entry, and still be right eventually. It also gives us some chances to trade in both directions in a relatively small time frame. But ultimately, if you are looking to just be really directional in 2018 because you missed 2017’s US Dollar selloff, you may be in for a rude awakening. In addition, events (geopolitical and financial conditions) are changing at such a rapid rate, in about 3 minutes from the time you read this blog to the end of 2018, we may have to scrap the “Sell US Dollar” theme and go the other direction.
Good luck and trade safe,