Up or Down Dollar? Short the Euro Instead

From the Desk of Ian Culley @IanCulley

Check out these currency headlines:

The Buck Strikes Back… 

Investors Sideline a Defiant Dollar… 

Dollar Down? The 10-Year Says “Yes!”... 

The USD Rally Proves Sticky… 

Weighing a Potential Dollar Breakdown…

Well, which is it? Is the dollar going up… or down?

I have no idea. 

But given the market's current shape, your best forex bets are to short the euro and buy the yen…

If that sounds familiar, I shared a similar perspective during last month’s Fed Day.

A month and a half later, the euro is trading at the same levels:

On May 1, the euro-dollar pair retested our breakdown level of 1.0745 from earlier in the spring. 

A 150-pip rally followed. But now, the euro is undercutting the same level, flashing another sell signal—a clear example of the muddy waters that have dominated the forex markets for months.

Meanwhile, momentum is printing a bearish divergence, and the topping formation mentioned in mid-April appears more plausible.

I’m short the EUR/USD below 1.0745, targeting 1.0450.

The yen is another repeat offender. 

Instead of the forex pair, let’s take a look at the futures contract:

You’ll notice momentum is the dumps within a bearish regime, and price is declining below a downtrend line – zero signs of a bullish trend reversal.

That will change if and when price closes above .6500.

I like buying Japanese yen futures above that level with an upside objective of .6850.

Of course, you could express the same thesis by shorting the euro against the yen.

Here’s a more direct route: The euro-yen cross:

The setup is simple: Short the EUR/JPY against 170 with a rough target of 164 (close to the November 2023 high).

If price breaks back above our risk level, walk away.

The markets will be more volatile after tomorrow’s interest rate decision and Powell’s press conference, so tread lightly.

The bigger picture: If the short-euro trade works, US stocks will experience dollar headwinds. 

A stronger dollar could prove more challenging for stock market bulls as upside participation narrows despite the Nasdaq and S&P's new all-time highs.

Either way, it’s messy out there. 

All we can do is protect our capital and roll with the punches.

-Ian

Thanks for reading.

As always, let us know what you think.

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