The US Dollar: After The Big Trend Comes Consolidation And Continuation

As currency traders can confirm, the past few weeks have been quite wild for the US dollar. Where are we headed from here?

First, it’s worth noting the macroeconomic fundamentals are still bearish on the US dollar. The increasing number of bailouts, particularly the Fannie and Freddie bailout, make an expansion of the money supply to pay for these failures quite likely. An overexpansion of the money supply will likely lead to further devaluation of the US dollar, and may even cause central banks to decrease their holdings of dollars as well as the decline of the US dollar in international trade. As such, the fundamentals on the US dollar look quite bearish.

Technically, we’ve recently seen the US dollar dropping in value. The chart below shows that the US dollar is currently trading in a tight range, as its recent losses are consolidating. More specifically, we can see a pennant formation; the flagpole part being the long run up, with the pennant being the triangular consolidation phase. This is typically viewed as a continuation pattern, which would suggest the bull trend in EURUSD — and thus, a devalued dollar — will continue.

Based on the 4 hour and daily charts, there are a few price points traders should be wary of:

• Traders looking for short momentum should look to see how the market behaves around 4620 and 4570; sustained breaks below those levels could suggest a downward trend is forming
• On the long side, traders should consider 4750 and 4850 as key resistance levels.

Either way, one thing is for certain: the volatility and economic uncertainty we’ve seen in the past few weeks isn’t over yet.

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