There are many ways to analyze a market.
Two of the most popular methods are fundamental analysis and technical analysis. Here at Market Minute, we tend to focus on the technical side a bit more.
But every now and then, they both seem to line up.
That’s the case right now for one of the world’s most important markets: the U.S. dollar. So, let’s shed some light on the fundamentals behind this trade…
This year has been truly weird for the dollar. The dollar index (DXY) has whipsawed violently over the last 11 months.
At one point, the dollar was down nearly 4% on the year. And at another point, the dollar was up about 3.5%.
Despite all that action, DXY is now virtually unchanged. The dollar is up by just over 1%.
That’s all going to change as we head into next year.
Like we mentioned earlier, the technicals and fundamentals for the dollar are all lining up.
Last week, we finally got some clarity from the Fed. Although Fed Chair Jerome Powell did not outright say that the spree of rate hikes is over, the Fed’s actions spoke louder than words.
Last Wednesday marked the second time in a row that the Fed has failed to raise interest rates. It seems the higher interest rate environment is finally affecting the broader economy.
If the Fed is at the end of its rate-hiking cycle, that would be a huge blow to the dollar.
Higher interest rates have made the dollar very attractive. Not just compared to investments like bonds, but also relative to other major currencies like the euro. Simply put, higher rates means a greater return when owning the dollar.
If the market is confident that interest rates aren’t getting any higher, the dollar will be repriced much lower.
The technical analysis supports this view – DXY is trading below its 20- and 50-period moving averages (MA) for the first time since July.
This means the downtrend that started back in late 2022 is getting ready to resume.
You can check out the chart below:
All that’s left for DXY to confirm its reversal is a few more days of bearish trading. That should be enough for the 20-MA to cross below the 50-MA. This bearish cross will be an important signal for technical traders.
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2024 is shaping up to be a very exciting year. A major reversal in the dollar will set us up for some amazing currency trades over the next several months.
The entire currency market revolves around the dollar. It’s the most liquid currency in the world. So whenever the dollar is on the move, it means volatility for other currencies too.
Do you believe DXY will reverse?
Let us know your thoughts – and any questions you have – at [email protected].