Fundamental Analysis: Dollar Strengthens as Tariffs Return

It’s another busy week in the FX Market, with the US dollar gaining strength and concerns about trade tariffs resurfacing. Let’s break down what’s happening and how it could impact your trading decisions.

Dollar Gains Momentum as Tariff Fears Return

The US dollar is making a strong comeback after a period of decline. This resurgence is largely due to President Trump’s recent announcements about imposing new tariffs on goods from Canada, Mexico, and China. He’s even hinted at the possibility of adding tariffs on products from Europe, which has made markets quite nervous.

When traders and investors feel uncertain about the future, they often look for safe places to put their money. And the US dollar is often seen as a safe haven during times of economic uncertainty. So, with all this talk about tariffs and potential trade wars, it’s no surprise that the dollar is gaining strength.

It’s also important to remember that the US economy, despite some recent mixed signals, is still fundamentally strong. This underlying strength gives the dollar further support.

The US Dollar Index (DXY) is at a crossroads, currently sitting at the key level of 107.5 within a downward-trending channel.

Some traders believe this could signal a broader trend reversal, but we need further confirmation, likely a break below 106.00, to solidify this view.

Conversely, if the DXY breaks out of this channel and pushes above 107.5, it could signal a further strengthening of the US dollar and a continuation of the long-term uptrend. This makes the current level a critical juncture for the dollar’s direction.

Jobs Report in Focus

This Friday, all eyes will be on the [b]Non-Farm Payrolls (NFP) report[/b], a key indicator of the health of the US labor market. This report tells us how many jobs were added or lost in the US during the previous month. A strong jobs report usually gives the dollar a boost, and most analysts are expecting to see decent job growth.

In addition to the number of jobs created, we’ll also be watching the unemployment rate closely. The unemployment rate tells us what percentage of the workforce is actively looking for jobs but can’t find them. A low unemployment rate, like high inflation, gives the Federal Reserve (FED) more room to keep interest rates higher for a longer period, which can be a good sign for a strong dollar.

Eurozone Facing Challenges

Across the Atlantic, the Eurozone is facing its own set of economic challenges. They’re dealing with a difficult combination of high inflation (rising prices) and slow economic growth. This situation, known as “stagflation,” can be tricky to navigate.

The European Central Bank (ECB) is responsible for managing the Euro and keeping the Eurozone economy stable. They are trying to keep inflation under control without causing the economy to slow down too much. It’s a delicate balancing act.

The ECB is expected to continue gradually reducing interest rates, but any unexpected policy changes could create volatility in the value of the Euro. Traders will be watching closely for any hints about the ECB’s future plans more than the rate decision itself.

EUR/USD is currently stuck in a sideways pattern, bouncing between 1.0500 and 1.0200. Within this range, there are some key levels to watch, particularly 1.0380 and 1.0280.

If EUR/USD breaks down below 1.0380, it could signal a further decline towards the bottom of the range. However, this move would likely need some help from fundamental factors, such as a very dovish European Central Bank (ECB) this week or a surprisingly strong US jobs report (NFP).

Aussie Dollar Under Pressure

The Australian dollar, often called the “Aussie,” is feeling the pressure from the ongoing trade tensions between the US and China. This is because Australia has close economic ties with China, and any disruptions to that relationship can negatively impact the Australian economy and its currency.

This week, Australia will release some important economic data, including retail sales figures (how much people are spending) and GDP (which measures the overall size of the economy). If these numbers are positive, it could give the Aussie dollar a boost. However, if the numbers are disappointing, the Aussie could weaken further.

The AUD/USD pair appears to be finding some support around 0.6200. But, if the US dollar continues to strengthen, this might just be a temporary pause before further declines.

Key resistance levels to watch are 0.6250 and the stronger 0.6300 level, which also aligns with a 50% Fibonacci retracement. These levels could push the Aussie dollar back down if the dollar’s strength persists.

Swiss Franc and Canadian Dollar: What to Watch

The Swiss franc is known as a safe-haven currency, which means investors often turn to it when they’re worried about the global economy (similarly to US Dollar). Switzerland will release inflation data this week, which could affect the value of the Swiss franc. If inflation is rising, it could make the Swiss franc more attractive to investors as SNB might be taking a more hawkish approach in their monetary policy.

USD/CHF has returned to its previous trading range of 0.9000 – 0.9200 and is currently forming a potentially bullish reversed head and shoulders pattern. If this pattern plays out, we could see USD/CHF pushing back towards 0.9050 or even higher.

However, it’s important to acknowledge the bigger picture. On the 4-hour timeframe, the market is still making lower lows and lower highs, suggesting a prevailing downtrend. This means a return to the 0.8920 level is still a possibility. Traders should watch price action closely to see which direction ultimately prevails.

The Canadian dollar, on the other hand, is facing some challenges due to trade tensions with the US and because its central bank has been lowering interest rates. Lower interest rates can sometimes make a currency less attractive to investors. Canada will also release important jobs data this week, which will give us a better picture of how their economy is performing.

USDCAD, like USDCHF, has retraced back into its previous trading range of 1.4460 – 1.4300, and it appears to be stalling at the top of this range.

If we see a confirmed bounce from this resistance, USDCAD could be headed back down to the bottom of the range around 1.4300. However, given the potential for continued US dollar strength, we can’t rule out a breakout above 1.4460, which could send the pair back towards the 1.4600 level where it was trading earlier in February. This makes USDCAD a pair to watch closely for a potential breakout in either direction.

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