The dollar will be stronger going forward

My frequent readers know by now that I've been very vocal about US dollar strength throughout this year. It is true that there have been many a times during the past 12 months when the dollar depreciated against the euro and, in particular, against the Japanese yen. That was usually the case when the Federal Reserve kept the market guessing about its future policy moves, including the timing of its first interest rate hike, or when the European Central Bank could not persuade the market of its capability to sustainably increase inflation through its monetary policies, such as negative interest rates and extensive quantitative easing programmes. However, no matter how tenacious the dollar's sideways range has been (just look at EURUSD, which had been stagnating since April 2015), I've always stuck with my conviction that the US dollar would ultimately emerge from this inconvenient bout of range trading as the stronger currency in comparison to the rest of the G10 currency basket.

The main reason being that the US economy has been able to put its economic recession behind itself earlier than European economies managed to do. This time gap of perhaps one to two years was a strong indicator of increasingly divergent fiscal and monetary policies in the US and throughout the euro zone that would help strengthen the US dollar and, on the other hand, devalue the euro. Although this did indeed happen to some degree up until March 2015 when the EURUSD exchange rate came close to reaching $1.05 but instead came to a halt at the intersection of two long-term trend lines and entered the aforementioned sideways market. I must admit that I greatly underestimated the amount of time it would take for the US dollar to resume its appreciation, and that it would be the election of Donald Trump as the next President of the United States that would trigger the dollar's renewed vigor is still somewhat beyond me.

Anyway, the time has finally come that we're seeing a strong trend in EURUSD again. The only thing that worries me at this time is the pace at which it unfolded. Within merely 10 trading days we went from the election night high of $1.13 to today's low of $1.0568 -- that's almost an eight big figure move without noteworthy backlash! The daily RSI currently reads 22 and other oscillators confirm that the pair is oversold. While I appreciate the fact that such moves often extend even beyond these levels, I must also acknowledge that the previously favourable risk-return profile of the EURUSD short trade has worsened significantly, which is exactly why I closed my USD long trades yesterday. Traders thinking about selling the euro versus the US dollar should think thoroughly before doing so. Personally, I expect a bit of profit taking to begin soon, but I will stand ready to buy the US dollar again once the extreme momentum has abated. The US dollar still has the majority of arguments on its side, and that is not going to change unless the ECB and, more importantly, the Fed will disappoint in December. Next month will be at least as interesting (or should I say, challenging?) as this month turned out to be.

US government shutdown looms... again

Once again, the US government faces a possible shutdown as it has so far been unable to agree on a higher debt ceiling. US Treasury secretary Jack Lew told Bloomberg that the United States only had about $50bn left and could run out of funds as early as October 17, if no deal will be reached. Given the still uncertain state of the American and the world economy, it is careless that the Democrats and Republicans persist on their positions and are unwilling to compromise. Ideally, they would realize that they're an elected government that must respond to potential threats, such as the inability to pay the nation's bills. In reality, each party is constantly looking for ways to make the other one look bad.

International stock markets have reacted accordingly by moving funds to perceived safe havens, such as gold. Stocks slipped and the USD softened slightly, as measured by the dollar index. Unlike in 2011, there were no extreme price moves, however, as the market still expects the government to reach a deal by October. This is one of those low probability events bulls do not want to happen, so investors are advised to watch the US government's progress (or lack thereof) closely. A deal must be reached by October 1.

The EUR/USD rate is currently at $1.3493, approximately 2.2% above its level from the beginning of the year and more than 5% above the level from mid-July. GBP/USD is at $1.6020.