Dollar Down? Buy the Pound!

From the Desk of Ian Culley @IanCulley

The US dollar sits atop the heap.

Major global currencies, including the Australian dollar, the New Zealand dollar, the Japanese yen, the Canadian dollar, and the Singapore dollar, are limping lower against the greenback.

The long list could grow in coming sessions as momentum builds behind a sustained USD advance.

While the evidence suggests we lean in that direction, I always prepare to take the other side of a trade if and when the data changes.

So, what’s the best way to play a falling dollar?

Before I share my favorite trade setup, let’s look at the US Dollar Index $DXY: 

DXY is finding resistance at the July pivot highs and a downtrend line originating with the March peak.

It makes sense for the dollar advance to pause at this level. And it has.

If DXY absorbs the overhead supply and rips above 1.0350, the following trade will not work.

But if it begins to roll over after testing a logical resistance zone, my money is on this next dollar pair.

Check out the British pound:

I like trading the pound for two reasons: Our risk is well-defined, and the risk-to-reward profile skews heavily in our favor.

It doesn’t hurt that the pound is trending within a bullish momentum regime, bouncing off the lower bounds of its year-to-date range on the 14-day RSI.

The last two times momentum bounced off these levels coincided with excellent buying opportunities. 

Will a third bounce mark another solid buy? Perhaps.

All I can do as a trader and analyst is weigh the evidence and define risk. 

Here, 1.2610 is the risk level. I like trading against that level from the long side with an initial objective of 1.3150 and a longer-term target of 1.4300, coinciding with the 2018 and 2022 peaks.

But if it falls below my risk level, all bets are off.

I imagine many equity plays are coming off the board if and when the pound undercuts that critical level, as few risk assets appreciate a stronger dollar.

Thanks for reading.

Let me know what you think. I love hearing from you!

And be sure to download this week’s Currency Report!