USD – What if the Dollar were Doomed Already?

March 28, 2018

4 min read

Dear Traders,

Many analysts, including myself are expecting a temporary USD strength to return in the coming weeks. My previous analyses were mainly highlighting these USD strength scenarios. But today’s post will explore a much more gloomy scenario for the dollar, which could yet appear over the coming trading days.

Trend Channels Are Unbroken

The EURUSD and GBPUSD have been in sturdy bullish trend channels (see pictures). They are both dancing around price levels where a bearish reaction MUST happen very soon if the bearish scenario for these currency pairs are to remain valid (i.e. EURUSD bearish scenario = forming a diagonal as wave A of 2 and GBPUSD scenario = about to start a wave 3 of a new bearish trend).

The wave patterns are very difficult to read within these channels, with both bearish and bullish options possible (numbers shown in pictures are very rough labels for bullish scenario). The fact is that until price manages to break out of these channels to the downside, a very strong bullish continuation is still possible. So what are the scenarios in this case?

GBPUSD

A break of the January high would seriously bring into doubt the longer-term analysis for the cable still only being in a bullish correction. The odds that significant downside lies aheadb becomes very weak if we see another high
In the worst case scenario (from a USD perspective), price may be building a sequence of 1-2 waves that would mean massive bullish momentum to come. The correction since the January high has become probably far too big to still have anything to do with a wave 4 of the previous swing. If we get a break to the upside, it would most likely mean that all this sideways range we have seen since January was part of a larger scale wave 2 to the upside.

EURUSD

Here too, an even more bullish scenario would come about if price breaks into new highs directly from here. Just like with the GBPUSD, the complex correction since the late January high is becoming ever more disproportional to the previous wave 3. Thus it has very likely nothing to do with it anymore. A bullish scenario could in fact mean that the correction between Feb 16 and Mar 1 may have been a subwave 2 of an extended wave 3 since the low of November 2017, which would imply that massive bullish momentum lies around the corner.

Although there are good arguments for why such immediate dollar weakness may be unlikely, the truth is that the Greenback must begin to show significant strength now in order to avoid getting crushed for the foreseeable future. The longer-term picture does not look good for the dollar in any case, with numerous USD pairs showing significant weakness potential. The question is simply how quickly and how severely its fate will decent upon it.

All the best along your trading journey

Hubert