From the desk of Ian Culley @IanCulley
The US dollar has answered any and all questions about its strength over the past few months.
During Tuesday's session, there was no place to hide, as King Dollar continued the Fourth of July celebrations, putting on its own fireworks display.
It lit up every currency on the board as major forex pairs continue to go down in flames.
Two that stood out were the EUR/USD and the GBP/USD.
Yes, these crosses have been trending lower since the beginning of the year. But with the critical levels that broke yesterday, we're anticipating fresh downside legs and prolonged dollar dominance.
Let’s take a look.
Here’s a chart of the EUR/USD:
On Tuesday, the euro decisively broke down to its lowest level in almost two decades.
Given its majority composition of the US Dollar Index $DXY, the breakdown was critical in catapulting the index higher and solidifying the DXY breakout from earlier this spring.
We want to sell any strength back toward approximately 1.0350, targeting approximately 0.90. This trade is null and void on a close back within its prior range. If that does happen, we’re probably witnessing a failed move in the DXY.
The British pound was another important European currency to undercut a pivotal shelf of former lows.
The pound is completing a multi-year double top formation and challenging levels associated with the initial Brexit sell-off.
As long as the GBP/USD cross is below about 1.20, we like it short with a target near 1.05, bordering on parity.
We know the downside objective might sound aggressive. But when we put the breakdown into perspective, it’s more than possible. We’re looking at lows not seen since the mid-1980s in the coming weeks and months.
It’s uncertain whether these new lows will materialize. However, the near complete lack of price memory below about 1.14 is a fact. Buyers are lost below those former lows.
When we combine that with the breakdown in the EUR/USD, near multi-decade highs in the USD/SEK, and the highest levels for the DXY since November 2002, it appears the USD rally is just getting started.
What does that say for risk assets?
Stay tuned!
Thanks for reading.
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