Dollar Dims While Gold Shines

The Greenback has had a tough week, and the knocks look set to keep coming. The dollar index slipped another 0.5% on Monday 15 January, to trade at three-year lows. I initially argued that the ongoing USD selloff was the result of concerns over low inflation in the United States, but Friday put paid to that theory.

Core consumer data released last week showcased the biggest increase in U.S consumer prices for 11 months, bolstering expectations that inflation looks set to pick up pace this year. With inflation strengthening, rumors of March’s Federal Reserve interest rate hike are gaining momentum. Ordinarily, this would help prop up a flagging Greenback but it continues to wallow, suggesting currency weakness may be a recurrent theme this quarter.

It is possible that the Dollar’s selloff is in part down to political risks, scandals, and machinations currently gripping Washington. A 2017 study by the University of California, Berkley, identified that much of the Dollar’s attractiveness as a reserve currency was the result of a ‘security premium’ – i.e., the historical dominance of the currency was intrinsically tied to America’s position as a global superpower and the protection it offered allies. With the current administration flip-flopping over alliances, embarking on a war of words with Pyongyang, and actively provoking tensions in Palestine, it could be that USD has lost its ‘security premium’.

That said, anxiety over the impact of Trump’s tax overhaul is also like to color investor sentiment. I believe the Dollar remains at the threat of steeper losses if the impact of Trump’s tax reform fails to meet market expectations.

Taking a look at the technical picture, the Dollar Index is heavily bearish on the daily charts. There have been consistently lower lows and lower highs while technical lagging indicators, such as the MACD, point to a downside. The breakdown below 91.00 could encourage a further decline towards 90.00 and 88.00, respectively.

Gold continues to shine

From a technical standpoint, Gold is heavily bullish on the daily charts. The Candlesticks are trading firmly above the 50 Simple moving averages, while the MACD has also crossed to the upside. A decisive breakout and daily close above $1340 could encourage a further incline higher towards $1360. Alternatively, a situation where bulls are unable to keep prices above $1340 could trigger a technical correction back to the $1325 level.

This article is written by Lukman Otunuga, a senior analyst at FXTM