US dollar weighed down by trade and interest rate policies

Despite a rosy economic picture in the US, the dollar is still under strain

With prices at unprecedented four year lows, what's next for the dollar? Photo: EPA

The US Dollar Index, a measure of the value of the US dollar against a basket of currencies, teetered and dropped to quarterly lows in March, which also happen to be the lowest the index has been since December 2014.

Despite the upside move in February, the expected first quarter target of 88.90 has fully materialised. But what’s next for the dollar? With prices now at unprecedented four year lows, a look at longer term technical data may provide some key insight.

By plotting data from March 2008 - when the Index was at its lowest at 72.10 – until January 2017 when it hit its highest at 102.80 -  we can see the index is currently consolidating in the band between the 50 and 61.8 per cent of this entire range. The Fibonacci study, a key technical study in future price forecasting, suggests that considering the sell off from the start of January, there is more room for downsides towards 87.44 levels, which represent the 50 per cent band of this channel with a maximum downside potential at 83.82, which represents the 38.2 per cent band of this channel. Looking more short term, and at the month ahead, I am expecting range bound prices in the index. Lows of 88.15 should hold while 90.90 forms the ceiling of any upside dollar move this month.

Fundamentally, it’s important to reiterate the US economic picture is showing good signs of improvement. GDP has shown growth, inflationary data remains in control, and well within the Fed’s mandate, and payrolls continue to improve amid a robust unemployment rate. With so much good economic data from the US, one would expect a stronger dollar, however, the interest rate differentials between the US and other leading economies is causing money to pour out of the greenback and into currencies whose central banks are starting their rate hike cycles. The upcoming Trump trade policies are also weighing down my Dollar forecasts.

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Coming up in the month ahead, keep an eye out for the monthly payrolls data due on April 6.  A number above 200,000 is needed to maintain the run of good numbers. This will be preceded by US inflation data due out on  April 11. Expect a stronger print in both numbers to see immediate buying support come in the Greenback (and vice versa) however this will not see a break of the aforementioned trend for this month, with range bound movement between 88.15 and 90.90.

With so many asset classes performing against the dollar, long positions are the most comfortable in the euro against the dollar. The Dubai Gold & Commodities Exchange (DGCX) EUR/USD contract struggled in its run to 1.25 levels, which we have previously noted as a key resistance level. With a rather dry economic calendar for the euro, we don’t expect too much volatility through the middle parts of April - however watch for a move below 1.23 before considering long positions with an eye on that 1.25 resistance level.

The British pound has also had a nice run against the dollar and the Cable (the GBP/USD currency pair rate) has now retraced more than 90 per cent of the downside move following the Brexit vote two summers ago. The pound's bounce back has been surprising and perhaps beat many analysts' recovery time frames. While the longer term picture depends on the upcoming UK and EU negotiations, the shorter term picture sees more range bound pricing with a slight bullish bias. Expect to see another run towards 1.4270 levels in the DGCX’s GBP/USD contract with downsides capped at 1.39 in the month ahead.

Gaurav Kashyap is a market strategist at Equiti Global Markets