The dollar index is trading close to critical support

January 11, 2021

As highlighted in our weekly report, last year, the US dollar displayed weakness against the other major currencies and, so far this year, this trend has continued. The dollar index is in a zone close to the critical support level of 90.00, so a confirmation of a downward break could prolong this weakness.

The US dollar’s weakness can be explained for several reasons:

The coronavirus pandemic. This global crisis has caused the Fed to strengthen monetary stimulus policies, liquidity injections and low interest rate policy.
Weakness in the labour market. The NFP released in December and the one released last week have both been far worse than anticipated.
Political and social instability within the US.

Dollar weakness may also be part of a strategy to make US companies more attractive and competitive in the export market, thereby boosting the main stock market indices. These, after sharp falls at the beginning of the pandemic, ended 2020 at historically high levels, particularly the Nasdaq which saw large rises.

EURUSD Analysis

Technically speaking, and despite last Friday’s poor employment data, last week the EURUSD went through a week of consolidation, dropping from its highs to the 23.6% Fibonacci retracement level of its last bullish momentum. However, the uptrend remains strong after finally breaking out of the side channel. It is not out of the question that the EURUSD could make a correction in the coming days, but provided it does not break below its previous resistance level (green), sentiment will remain bullish and could reach levels close to 1.25.

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Depicted: Admiral Markets MetaTrader 5 – EURUSD Daily Chart. Date Range: 8 October 2019 – 11 January 2021. Date Captured: 11 January 2021. Past performance is not necessarily an indication of future performance.

Evolution of the last five years:

2020 = +8.93%

2019 = -2.21%

2018 = -4.47%

2017 = +14.09%

2016 = -3.21%

GBPUSD Analysis

In the case of the GBPUSD, we can observe that this pair has been following a very clear uptrend ever since it hit a low of around 1.14100 on 20 March 2020 and has since risen above the 1.37 level.

Currently, as with the EURUSD, the pair is correcting itself from the highs of last week by testing the December 2019 high again. It is important to see if the GBPUSD is able to maintain this support level, in line with its 18-session black average, or whether it will increase this correction to its trend line to seek new momentum, as in previous cases.

In the event of breaking the trend line downwards, the price could look for its 200-session average in red, which is close to the 1.30 level. The last support level would be the red line.

Depicted: Admiral Markets MetaTrader 5 – GBPUSD Daily Chart. Date Range: 11 September 2019 – 11 January 2021. Date Captured: 11 January 2021. Past performance is not necessarily an indication of future performance.

Evolution of the last five years:

2020 = +3.10%

2019 = +3.95%

2018 = -5.54%

2017 = +9.43%

2016 = -16.26%

USDJPY Analysis

Finally, in the USDJPY, we can see how the Japanese Yen has once again behaved as a major asset since the beginning of the crisis. This is underpinned by the fact that, in times of crises, Japanese investors tend to unwind their overseas positions and seek refuge in their own currency.

This behaviour has led to the price breaching its support level of 104.00 yen per dollar. It will be important to see if it is able to regain this support level or if it continues to fall. The loss of the lower band of the wide channel could lead the USDJPY to look for levels close to or below 100 yen per dollar.

Depicted: Admiral Markets MetaTrader 5 – USDJPY Weekly Chart. Date Range: 31 August 2014 – 11 January 2021. Date Captured: 11 January 2021. Past performance is not necessarily an indication of future performance.

Evolution of the last five years:

2020 = -4.95%

2019 = -0.88%

2018 = -2.76%

2017 = -3.59%

2016 = -2.85%

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By Admiral Markets