It is clear that the US Dollar has been under some pressure of late, its ongoing uptrend appears to be under threat as the markets take on a risk aversion mood and with the stock markets looking less than attractive the USDJPY is moving downward significantly, USDJPY has broken an important trendline and looks very bearish (recent trade post on USDJPY). The chart below shows the dollar index (weekly FXCM Dow Jones), it shows that the Dollar is still in an uptrend with a series of higher highs and lows which counts pretty well as a Elliot wave impulse that target for this move is around 13200 continuing the series of higher highs.
The recent rise in the dollar has been fuelled by interest rate rises resulting from the excellent performance of the US economy, the surprise index is our method for quantifying the performance of each of the major economies. (surprise index methodology) The index rises when the economy is doing better than forecast and better than previous months and falls when the opposite is true, the data is collected from the excellent FXSTREET Economic Calendar. The results for the US economy can be seen below.
The surprise index for the UK economy is shown below, it pretty much kills off any ideas of buying the pound, the economy had a big downturn at the start of 2018 recovered a little but has ended 2018 back near its lows, the surprise index looks no more attractive than the US one.
The chart shows the performance of the US economy in 2018, it does not take much to see the pattern, in the first half of the year the economy was on fire and the dollar was on the front foot but since then the index has been moving steadily lower, this does not mean contraction but means the economy is performing less well than expected. The surprise index crystallises the economic situation and shows why people are dialling back their expectations for future interest rate rises. The markets negative sentimnet would appear to have some justification.
The problem is finding something to trade the USD against, it is still in an uptrend so we don’t like selling it across the board so we have to find a beaten up currency that has potential to move higher against a weaker USD. The GBP is an obvious candidate, Brexit has moved the GBP significantly lower we were targeting 1.19 with last years trade taken at 1.32 and from a technical standpoint we can see no reason to change this view, the flash crash yesterday caused a new low suggesting the pair will continue lower. There is much confusion around Brexit and it is possible the market has been too negative, it is still possible a deal is done and there is an outside chance of a new referendum and no Brexit at all. Perhaps long GBPUSD is a trade?
January often sets the tone for the rest of the year, trends starting now can last many months and we like trading on this longer term horizon but the market is not clear, technically we can not sell the US dollar, economically it is difficult to buy it. So for the time being we are on the side-lines and will have to wait for the next opportunity. Of course we have several other candidates, the JPY, the Euro and commodity currencies (AUD, NZD, CAD) all have potential in the coming days we will update the surprise index for each of theses and give our views for the future.