What is the Us Dollar Forecast for 2018? Volatile markets as economics improve and world central bankers embark on a path of policy tightening.
How to Trade the Dollar in 2018? Using shorter term positions with a keen eye to support and resistance targets, economic data, central bankers and especially the FOMC.
Can you Make Money Trading the Dollar? Of course, and we can help you. Read on to find out what you need to know to trade the dollar in 2018 (and make profits). Click Here To Go Straight To Our Dollar Volatility Video Forecast
The US Dollar Forecast For 2018
The Usd forecast calls for volatile markets but volatility within a long-term trading range. Prices are going to be driven by shifting central bank outlook, a shift toward policy tightening, that is being driven by improving global economics and leading traders to riskier currencies.
Future Dollar Value Prediction is tougher than ever because global central bank policy is coming back into alignment. Over the past few years, the FOMC has been on a path of tightening while other banks were firmly entrenched in easy money QE policy. This put them in divergence; where the dollar was strengthening the euro, yen, and pound were weakening.
The US dollar forecast 2018 is a little different because policies that were once diverging are now coming back into alignment. This began last year with the ECB when they began to taper their bond purchases. Since then the EU’s central bank, and others have made a shift toward hawkishness that has yet to realized in policy.
Why is the dollar falling? It’s not because the US economy is on the verge of collapse because it isn’t. It’s because, while the US economy is improving and driving the value of the dollar higher, economies around the world are improving and driving their respective currencies higher. This tandem strengthening is resulting in a stalemate that has traders favoring risk-on assets like the euro, the pound, the Australian dollar and others.
- The US dollar is tracked in many forms. The most common US dollar symbol is DXY or the Dollar Index. The Dollar Index is a measure of the dollar against a basket of world currencies and the one most often referred to in the media. The US dollar exchange rate varies with each currency individually, making it very difficult to track them all.
Will the US dollar collapse? Not likely say the experts and we agree. The US dollar is the worlds leading currency, from the worlds leading economy and used by more people globally than any other. It may lose favor to others as global expansion continues and cryptocurrency investment gains favor, but it will not collapse. Not anytime soon, at any rate.
How To Trade The Dollar; The Technical Picture
The latest US dollar news has the Dollar Index trading just off a three year low. This low dates back to a time during the Fed’s Taper and just before the first US interest rate hikes. Since then the index reached a peak, driven by strengthening of hawkish expectations, and then subsided to today’s low levels. The index is now consolidating above the $88.50 support level and waiting for its next cues.
Looking at the chart above, the peak reached in late 2016 is coincident with a dimming of FOMC outlook as well as a shift in ECB policy. At that point expectations for the pace of rate hikes began to recede while at the same time the ECB began to talk up, and embark upon, their tapering plans. The markets expectations and dollar value had outpaced reality and a period of correction began.
Technically speaking, looking at the weekly chart above, the MACD momentum indicator is bearish but does not indicate a strongly trending market. The peak is small relative to others over the past year and diverging from the latest low in evidence of waning bearish sentiment and the possibility of market reversal. The stochastic indicator is likewise mixed in that it is low in the range, consistent with bearish conditions, but also pointing higher following a bullish crossover and consistent with support.
More recently, signs of economic strength in the EU, Japan, the UK, and Australia, among others, have pushed the dollar to its current lows, and it may go lower. The risk comes down to the central banks; the FOMC is on track to raise rates in the next two meetings with a possible three hikes this year. If the other central banks fail to follow in their path, the dollar will have little choice but to rise. Based on economic data it looks like most other economies are on track to grow, just like the US.
The daily chart shows an index that is bouncing off of support and may be bottoming. The index has formed a small double bottom pattern and bounced higher, but there is still resistance to be broken. As of this writing, resistance is the short term 30-day moving average, but that may change with the release of data over the next few week’s. A move above the moving average would be bullish and may carry the index up to retest higher resistance levels near $91, $92, $94 and $95.
How To Trade The Dollar; Economic Outlook
The US dollar news forecast is jam-packed with potentially market-moving events, and I’m just talking about US-based events. The number one to watch out for is the FOMC policy meetings that occur every six weeks. It is at these meetings that the FOMC, the Federal Open Market Committee, gives their take on the economy and fiscal policy. When they tighten policy, the dollar gets stronger, when they loosen it the dollar gets weaker.
The tricky thing for new traders to grasp is that moves in the dollar are driven by expectations for the FOMC as much as anything else. If the FOMC is expected to tighten policy the dollar gets stronger which means if they don’t meet expectations, or only meet expectations; then it could fall on the news. The next meeting is scheduled for March 21st and may well bring a rate hike so be ready.
According to the CME’s Fed Watch Tool, there is a 77.5% chance of a rate hike at the next meeting and a near 100% chance of a hike within the next three meetings. Looking beyond that the Fed Funds Futures market has priced in an 80% chance of 2 hikes by September and at least a 60% chance of 3 by December. These figures have been on the rise in recent weeks and, if that trend continues, will lend strength to the dollar.
The FOMC has a dual mandate to drive their decision-making process. The first is to support stable prices; the second is to support full employment. The second, full employment, has been reached by all measures that count, the second is still in question. The Kansas City Federal Reserve’s Index of Labor Market Conditions supports this idea. It is trending at 10-year highs with momentum near record levels since late 2016 and indicative of healthy labor markets.
The second mandate, stable prices, is better described as sustainable inflation and that target has yet to be reached. The Fed’s preferred gauge of inflation, the PCE Prices Index, has been running at a steady 1.5% over the last two years and not edging higher. It is this data in fact that has held their hand and caused the decline in expectation described above. They’ve said it time, and time again, persistently low inflation is a concern that will keep the pace of interest rate increases slow into the long term.
An increase in the pace of inflation could spur the bank to increase the pace of their timeline. If so this would put three hikes firmly on the table for 2018 with a possible fourth should inflation exceed their target. Looking to other signs of inflation there is reason to believe more rate hikes are possible. Wage inflation for one is picking up and trending at a rate above target, it has been trending at 2.5% since mid-2016 and recently spiked to 2.9%. The January CPI and PPI data both showed moderate increases in inflation with YOY figures also running above the 2% target.
Make Money Trading the Dollar; Watch The Central Bankers
If you want to make money trading the dollar, it is important to keep track of the major world central banks, not just the FOMC. When it comes to the Dollar Index, this means the ECB, the BOE and the BOJ for sure, and all three are expected to tighten policy in the not too distant future.
The one least likely to change policy is the BOJ, the Bank of Japan. The bank is firmly entrenched in its QE program, linked to Prime Minister Shinzo Abe’s fiscal stimulus plans, and has made no indication of a change. What they have done in recent months is adjust the number of bond purchases to maintain a zero-interest rate. This move, along with some better than expected data points, has led traders to believe the bank could begin altering its stance as a first move in the shift to policy tightening.
The USD/JPY has moved down to a short-term support target on this expectation and in position to break support. Support is the 107.50 level and has been tested twice in the past year. Each time it resulted in a bounce as US outlook trumped strength in Japan. This has resulted in a long-term trading range that may continue to dominate the pair in 2018. A break below support would be bearish, though, and could lead to a big drop in the dollar.
The next most likely to change policy and begin tightening is the ECB. The ECB let it be known in the minutes of the December meeting they were ready to alter the public’s perception of their policy stance. This comes in response to steadily improving economic conditions despite the problem of persistently low inflation. The bank is already in the process of tapering their bond purchases although the pace of that taper is slow. Regardless, the ECB has repeatedly said that interest rates would remain at their current levels for an extended period after the taper so any expectations in that regard may be wishful thinking.
The EUR/USD has been in an uptrend for the past year and now consolidating below long-term resistance at the three-year high. The pair may continue higher, the indicators are bullish, but there are some red flags to be aware of. For one, the pair is trading below long-term resistance at 1.2500. No move higher can occur until this is broken. The indicators are bullish, but both show weakness in the near term and divergences in the long term that suggest the rally is exhausted and potential for reversal.
If there is one central bank that can be expected to raise rates sometime this year it is the Bank Of England, the BOE. The bank has already raised rates once, in November 2017, as economic expansion in the country began to take hold. Data from England has shown further strength since then, suggesting another rate hike could come at any time, and this sentiment has been echoed by the BOE itself. They, in their February policy statement, increased their inflation outlook and said point blank the next rate hike would come sooner than the market expected and the pace of future rate hikes would be faster than expected.
The GBP/USD has also been trending higher over the past year but has recently fallen from a two year high. Resistance is near 1.3860 and may keep prices contained in the near term. Longer term, there is a chance the recent high will be retested and possibly exceeded. The tell will be, of course, the data and how it plays out with rate hike outlook.
How To Trade The Dollar In 2018; The Final Word
The dollar is at an inflection point, and this is seen across the charts. All three of the major dollar-based pairs are trading at a major, long-term level of support or resistance and preparing for the next big move. If the FOMC swings the balance of power in favor of the dollar these pairs could easily reverse their course and give up gains made in the last year. If not, if the ECB, BOE, and BOJ swing the balance away from the dollar, a continuation of 2017’s trends could be expected.
This is what we expect. All four nations are experiencing growth and on a path of policy tightening if not at the same point in the cycle. This means that we can expect the US dollar to gain strength on positive data, and for that strength to be offset by strength in the euro, the pound and the yen as those countries experience their growth. This means volatile trading in the nearer term US dollar forecast, and sideways trading with a chance of moving lower over the long term. How to trade the dollar, keep an eye on support and resistance targets. How to make money trading the dollar, keep an eye on the central banks.