April 22, 2018

Forex Markets: US Dollar Rallies on Middle East Tensions

US Dollar: Are The Rallies Sustainable?

  • Military conflicts and strong economic data support the outlook for USD-related assets.
  • Disconnect between technical and fundamental perspectives suggest traders should wait for price breakouts before structuring new positions.
  • Rallies above 26.40 in UUP confirm will the broader uptrend and suggest further rallies in the currency are still possible.  

Financial markets have been centered on US-related news headlines even more than usual over the last few months, and it does not look like this will cease any time soon.  Changing political agendas within the Trump administration have heightened tensions in the Middle East and sparked disagreements with larger economies like Russia and China.  This has send market valuations higher in the US Dollar and investors are now wondering whether these trends are sustainable.  Unfortunately, the technical picture is not matching with the fundamental drivers moving markets and this is making currency positions in the USD more complicated to structure.

The recent geopolitical turmoil in Syria has sent the Dollar Index to its highest levels in nearly a month.  In terms of tradable assets, this can be seen in recent rallies for the PowerShares DB US Dollar Index Bullish (NYSEARCA: UUP). But these rallies have not yet invalidated the shorter-term downtrend that has been in place since the end of last year, and this makes it difficult to start buying USD assets on a simple safe haven flight to safety.  This outlook will change if UUP is able to rally above 26.40 as this will end the series of lower highs since last December.  

At some stage, market investors will have to come back to the actual economic data as a justification for long positions in UUP.  Jobs reports have been largely positively although there was a somewhat disappointing figure in last month’s data.  Even with the weaker number, the underlying trend is still relatively encouraging and when we compare the labor market performances in the US to what is being seen in the Eurozone, there is clear evidence to support long position in the USD.

Trends in the labor market should be propelled in part by the much-improved consumer confidence surveys, which have now risen to levels that have not been seen in more than 15 years.  So, on the data side of the equation there is little to worry about in terms of the long-term strength in the US economy.

At the moment, however, the disconnect between the technical and fundamental perspectives suggest traders should wait for price breakouts before structuring new positions.  Rallies above 26.40 will confirm the uptrend and suggest long positions should be taken in UUP.  Conversely, price declines through 25.60 would signal a new downtrend is developing in USD-related assets.  In that case, it would make more sense to avoid UUP entirely, as there is too much distance between the technical and fundamental outlooks to justify new positions.


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