US dollar primed for more drops after disappointing December

Since mid-December, the US dollar has been the biggest loser among the various asset classes, dropping to more than three month lows against a basket of major currencies.

Despite Donald Trump and his Republicans delivering the long-heralded tax plan ahead of the Christmas holidays, market participants took the news in a positive stride and instead poured into higher yielding assets as risk appetite improved across the board.

With optimism high entering 2018, equities have been a big benefactor at the dollar’s expense – the Dow Jones 30 index broke through a record 25,000 and is trading at historic highs while the S&P 500 similarly finds itself at record highs above 2700.

Fundamentally, markets are taking confidence from an improving run of US data; economic growth forecasts are on the uptick with inflation very much in control.

Dollar longs won’t find any joy in this, which should see the index making another test of that key support level at 91.00. Technically, the Dollar index looks primed for more drops – the monthly Ichimoku suggests the dollar has slipped into a downward cloud with support coming in as low as 89 to 89.40 levels.

Expect to see some minor upside moves in the dollar on the back of relief rallies following the selloff that started in November.Upward momentum could also be built on the back of weaker US data releases: we saw the dollar rally briefly following a disappointing US nonfarm payrolls report on Friday that showed only 148,000 new jobs were added in December, well below the expected 190,000.

Therefore, a weaker run of US figures will be dollar supportive in the interim, but upsides should be capped between 92.50-93 levels going forward. This Friday’s US inflation report, will see volatility pick up in dollar crosses. Core year-on-year inflation is expected to come in at 1.7 per cent for the month of December, and we expect this to remain unchanged, however, any increases in in the short term month-on-month number could see some strength coming into the dollar.

Across the Pond, it’s been all positive for the euro. The common currency has been on an absolute tear to close out 2017. The EUR/USD cross on Dubai Gold & Commodities Exchange (DGCX) was up more than 6 per cent in December and finds itself comfortable consolidating above 1.20 levels.

Euro longs will definitely be humoured at the expense of the dollar going forward; and despite minor dips as a result of profit taking, the upsides are expected to continue in the EUR/USD cross. Expect to see first resistance at 1.2140 levels with strong resistance coming in at 1.2325 levels going forward.

The channel at 1.1950-1.20 is a strong psychological support level, which would need to hold to see our expected 1.23 and higher range to materialise by the end of the first quarter of 2018. We have maintained a stronger euro for the first half of 2018 – the currency should test 1.23-1.24 against the Greenback before the summer because of coordinated action from the European Central Bank, which will no doubt start introducing tightening measures this quarter.

And finally, the commodity segments also found the humour at the expense of the dollar. Gold finds itself comfortably consolidating above 1300 on DGCX with the West Texas crude contract also trading at 36-month highs above 60 levels. We prefer triggering long positions in the precious metal not before 1280 levels, with initial resistance keeping in at 1330 levels, followed by 1360 levels in extension.

Gaurav Kashyap, Market Strategist at Equiti Global Markets