– USD/JPY’s bearish momentum remains firm, with the symmetrical triangle breaking to the downside; more weakness is eyed.
– EUR/USD remains rangebound between the key reversals established on February 16 and March 1.
– Sentiment for the US Dollar is turning negative as we approach the last week of March.
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The US Dollar (via DXY Index) has undergone another bout of volatility thanks to the announcement of the Trump trade tariff against China. With the $50 billion tariff announcement yesterday, coupled with the response by the Chinese government to levy its own retaliatory tariff on $3 billion of US goods, it seems that our concerns of a budding trade war are well-founded.
The opening salvo in a potential globe trade war has yielded little positivity for global markets. Equities in the US were smashed lower yesterday, with Asian markets not far behind: the Japanese Nikkei 225, for example, has broken its uptrend from the June and November 2016, September 2017, and early-March 2018 swing lows. This environment is proving highly beneficial for the Japanese Yen.
Symmetrical Triangle Yields New Lows in USD/JPY
Following the breakdown in global equity markets, particularly the Nikkei 225, USD/JPY has seen the symmetrical triangle it was consolidating in during March yield a break to the downside. The move to fresh yearly lows, despite the rebound in the European trading session, should not be taken lightly, particularly as the geopolitical backdrop has eroded quickly.
Price Chart 1: USD/JPY Daily Timeframe (July 2017 to March 2018)
Price remains below the uptrend from the late-2012 and mid-2016 lows (diagonal line cutting from bottom left to mid-right on chart above), and the daily 21-EMA is still holding up as the backbone of weakness since January 8. With both MACD and Slow Stochastics now issuing sell signals in bearish territory, a ‘bearish’ bias remains appropriate with further losses eyed in the near-term. Only a close through the daily 21-EMA will provide just cause for us to revisit our outlook for more USD/JPY weakness.
EUR/USD Remains Stuck in Key Reversal Range
Seemingly immune to the trade woes plaguing other currencies, EUR/USD remains largely rangebound since the middle of January. The bearish daily key reversal on February 16 and a bullish daily key reversal on March 1 have kept the pair in check, definining what has been a near 400-pip range since January 15.
Price Chart 2: EUR/USD Daily Timeframe (July 2017 to March 2018)
Given that the Euro comprises 57.6% of the headline DXY Index, and that EUR/USD is failing to breakdown meaningfully, it is difficult to look at the DXY Index and say that the budding trade war will benefit the US Dollar. Indeed, if you recall our overview of tariffs and trade wars and their impact on the US economy and the US Dollar, the situation unfolding has the historical echoes of when the US enacted steel tariffs in 2002: a period of weakness in the DXY Index followed over the coming months.
For the DXY Index, the culmination of events this week – not only on the tariff side but also with a shakeup in White House personnel – bodes poorly for the future. A close below 89.43, the March 6 low, would greatly increase the likelihood of a retest of the 2018 low set on February 16 at 88.25.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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