Fundamental Analysis: US Dollar Under Pressure

Alright, let’s talk about what’s going on in the markets this week. It’s shaping up to be a pretty interesting one, with a few major factors all coming together to put pressure on the US dollar. We’ve got the ongoing situation with Trump’s tariffs, the latest inflation numbers coming out of the US (which are really important), and the decisions that central banks are making about interest rates. All of these things have the potential to make the markets move around a lot, so it’s crucial for traders to understand what’s happening and how it could affect their strategies.

The Dollar’s Big Drop: Tariffs and Economic Worries

The US dollar has been getting weaker lately, and a big reason for that is the concerns surrounding President Trump’s tariffs.

Here’s the deal with the tariffs in a bit more detail: President Trump is using tariffs, which are essentially taxes on goods that are imported into the US, because he believes that the country is buying significantly more products from other nations than it’s selling to them. He sees this as an unfair trade imbalance, and he’s hoping that tariffs will help to correct it. The idea is that tariffs will make foreign goods more expensive for American consumers and businesses, which would then encourage them to buy more products that are made in the US. In addition, Trump also hopes that the threat or imposition of tariffs will pressure other countries to agree to trade deals that are more favorable to the US.

However, tariffs aren’t a simple solution, and they can have a number of negative consequences that are making investors nervous:

• Higher prices for consumers: When tariffs are put in place, the cost of imported goods goes up. This increase in cost is often passed on to consumers, who end up paying higher prices for everything from clothing and electronics to food and cars. This can reduce people’s purchasing power and contribute to inflation, which is a general rise in prices.
• Damage to US businesses: While tariffs are intended to protect some US industries from foreign competition, they can actually hurt other American businesses. If other countries retaliate by imposing their own tariffs on US goods, it becomes more expensive for foreign buyers to purchase those goods. This can reduce demand for US exports, harming American companies and farmers who rely on selling their products overseas.
• Disruptions to global supply chains: In today’s interconnected world, many products are made using components and materials that are sourced from different countries. Tariffs can disrupt these complex global supply chains, leading to delays in production, increased transportation costs, and overall inefficiencies for businesses. This can affect a wide range of industries, from the automotive industry to the technology sector.
• Economic uncertainty: Perhaps the most significant negative consequence of tariffs is the general sense of uncertainty they create in the economy. When trade policy becomes unpredictable and subject to sudden changes, businesses are less likely to invest in new equipment, build new factories, or expand their operations. This can slow down economic growth and make it more difficult for the economy to perform well.

As a result of these concerns, the financial markets often react strongly to news and announcements about tariffs. Stock prices can fall as investors worry about the potential negative impact on corporate profits and economic growth. Currency markets also become volatile, with the US dollar particularly sensitive to changes in trade sentiment. Companies and industries that are heavily involved in international trade, such as manufacturers, agricultural producers, and technology companies, may face significant challenges as they navigate the shifting landscape of trade policy.

Technical Outlook (Dollar Index)

If you take a look at the charts, the Dollar Index (DXY), which is a measure of the dollar’s value against a basket of other major currencies, has broken through the support around the 103.50 area, which is a key level to watch. This means the dollar is facing strong selling pressure, and it could potentially fall further.

Given the current momentum, the dollar could very well continue its decline towards the strong support zone of 101.00 – 100.00. If that happens, traders will be closely watching for a reaction in that zone to determine the dollar’s next move.

What’s Happening with Inflation and Central Banks

In addition to the trade situation, there are a few other important factors that are moving the markets this week

US CPI Data: We’re getting the latest report on inflation in the US, which is called the Consumer Price Index (CPI). The CPI measures the average change in prices that consumers pay for a basket of goods and services, such as food, clothing, housing, and transportation. If the CPI shows that inflation is cooling down, meaning prices are rising at a slower rate, it could push the Federal Reserve, which is the US central bank, to cut interest rates. Lower interest rates generally weaken the dollar.

Labor Market Data: Recent reports on the US labor market, which show how many people have jobs and how much they’re earning, haven’t been as strong as they were earlier in the year. We’ve seen signs of:

• Slower job growth: The number of new jobs being created each month has been trending slightly lower, indicating that companies aren’t hiring as many new workers as they were before.
• Slightly higher unemployment: The unemployment rate, which is the percentage of people who are actively looking for work but can’t find it, has ticked up a bit.
• Subdued wage growth: The rate at which wages are increasing has also been relatively slow.

These trends suggest that the US economy might be slowing down, which could also lead the Federal Reserve to cut interest rates.

RBNZ Rate Decision: The Reserve Bank of New Zealand (RBNZ), which is New Zealand’s central bank, is expected to announce its decision on interest rates this week. The RBNZ has been taking a relatively cautious approach to monetary policy, and it’s widely expected that they will cut interest rates to try and support the New Zealand economy.

UK GDP Data: We’re also getting data on how much the UK economy grew in the last quarter. GDP, or Gross Domestic Product, is a measure of the total value of all goods and services produced in a country. The UK economy has been struggling with slow growth in recent times, and there are concerns about a potential combination of low growth and high inflation, which is called stagflation.

How This Affects Currency Prices

These various factors, including tariffs, inflation, and central bank decisions, can all cause changes in the prices of different currencies. Here’s a quick look at how they might affect some of the major currency pairs:

EUR/USD (Euro vs. Dollar): The euro has been gaining ground against the dollar recently. This is partly because the dollar is weak due to the trade situation and potential rate cuts, and partly because some investors see the euro as a relatively safe currency to hold during times of economic uncertainty. If the euro continues to strengthen and breaks above certain levels on the charts, it could potentially move even higher.

Technically, EUR/USD is still trading within the 1.1000 – 1.0950 zone. While we briefly broke above, the quick return to this level suggests a lack of strong conviction. Continued bullish momentum, however, could confirm the breakout, targeting 1.1200 in the coming days.

NZD/USD (New Zealand Dollar vs. US Dollar): The New Zealand dollar has been under pressure, meaning it has been losing value against other currencies. This is largely due to concerns about the impact of tariffs on the global economy and China, which is a major trading partner for New Zealand. The RBNZ’s decision to cut interest rates also contributes to the weakness of the New Zealand dollar. This pair could continue to trend downwards.

NZD/USD is trading within a reversed triangle pattern and is currently reacting to key support around 0.56, potentially extending to 0.5550. A break below these levels could trigger a sharp decline. However, with both currencies fundamentally weak, it’s important to await confirmation after the CPI and RBNZ releases before making predictions.

GBP/USD (Pound vs. Dollar): The British pound has been holding up relatively well in recent weeks, but it’s facing a key test this week with the release of the UK GDP data. If the GDP numbers show that the UK economy is weak, it could put downward pressure on the pound.

The pound has bounced from 1.3200 (highlighted in our previous analysis) and returned to the current 1.2850 support. A break below this level could lead to a move towards 1.2600, while positive GDP data could trigger a short-term reversal with a 1.3000 target.

How to Trade This Week: A Guide to Risk Management

Given the potential for significant market volatility this week, it’s really important to be careful and manage your risk effectively. Here are some key strategies to consider:

• Be prepared for big price swings: The markets could move very quickly and by a large amount, so it’s crucial to take steps to protect your account balance.
  • Use less leverage: Leverage is like borrowing money to trade. It can increase your profits, but it can also magnify your losses. In volatile markets, it’s generally safer to use less leverage.
  • Set wider stop-loss orders: Stop-loss orders are instructions to automatically close a trade if the price moves against you by a certain amount. Setting your stop-loss orders a bit wider than usual can help to prevent you from being stopped out prematurely by short-term price fluctuations.
• Make a plan for different scenarios: Before you start trading, it’s a good idea to think through how the markets might react to different outcomes and develop a plan for each situation.
  • What if the tariffs are much worse than expected? How will that affect your current trades? What adjustments will you need to make to your strategy?
  • What if the CPI numbers are a complete surprise? Are you prepared for both a significantly stronger-than-expected report and a much weaker-than-expected report?
• Stay glued to the news and data releases: This is definitely not the week to just set up a trade and walk away. You need to actively monitor the news and economic data releases to stay informed about what’s happening.
  • Pay close attention to the timing and details of the official tariff announcements.
  • Carefully analyze the CPI data and labor market data.
  • Keep track of how other countries and central banks are reacting to the news.

The Big Picture: Long-Term Implications

The decisions that are made this week about tariffs and the direction of the US economy will have significant consequences for the global economy and how currencies are valued in the long run.

• The risk of more protectionism: If more countries start using tariffs and other protectionist measures to restrict trade, it could disrupt global trade flows, make goods more expensive, and ultimately slow down economic growth around the world.
• The power of central banks: The actions of major central banks, particularly the Federal Reserve, will play a crucial role in determining interest rates, which in turn will affect currency values and the flow of money between countries.

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