Global equity markets strengthened their decline, and the dollar gained momentum after Fed minutes indicating a readiness to start QE tapering as early as this year. The dollar index rose to its highest level since November 2020, surpassing the reversal levels of July and April, indicating an upward exit from a prolonged consolidation. Historically, the dollar starts to add to its competitors shortly before a rate hike and for some time afterwards.
On average, this rally lasts for two to three quarters. However, the starting point should be June, when the DXY retreated from its local bottom below 90, adding 3.5% since. A breakout of the USDCAD above its 200-day average gives confidence that American investors have definitively chosen the dollar trend. The Canadian dollar has remained under pressure for a while despite rising oil, which shows the strength of forex undercurrents.
We should not be surprised if the impulse of the USD continues and gathers strength even in the first quarter of next year. In 2014, the last time it was in a similar situation, the DXY added 25% before rising sideways. It isn’t easy to expect such movements this time, but a return to the peak values of recent years around 104 should be considered a workable scenario.
For EURUSD, the bullish for the USD scenario opens a direct route to 1.0800-1.0500, where the pair has repeatedly gained support even during periods of high market turbulence in the last seven years. In other words, the downside potential here is 7-10%.
GBPUSD has crossed its line in the sand, confirming its cross below 200-day MA this week, while the 50-day MA has turned into a resistance.
Interestingly, there are almost no technical obstacles for the GBPUSD to decline to the 1.2000 area, 12% below the current levels. Often the Pound moves with more amplitude than the Euro, proving to be more sensitive to the fluctuations in market sentiment.
The situation in AUDUSD looks potentially interesting. Since June, the pair has been on a soft landing, but the decline is picking up sharply this week. Rising contagion cases and a tightening lockdown in the country adds to players’ nervousness. Should the pair fall from the current 0.7190 to 0.7000, the sell-off in the Aussie could become particularly fierce, heading the pair towards the 0.6300-0.6600 area.