Where the Dollar and the British Pound Could Go Next

We’re seeing heavy volatility in the currency market, as various asset classes continue to swoon. Here’s what the technicals say.

It has not been an easy year for investors. The S&P 500 is down more than 20%, bonds have gotten crushed and volatility is roaring through currencies.

Investors understand stocks and have a good idea surrounding bonds. There’s a reason currencies aren’t written about all that much unless something serious is happening — like now.

Volatility in currencies creates all sorts of headaches. From how we value assets to the earnings power of multinational companies, currency volatility creates a problem.

The U.S. dollar has had robust strength this year, with the dollar index and the Invesco DB US Dollar Index Bullish Fund  (UUP) – Get Invesco DB US Dollar Index Bullish Fund Report each up over 19% so far in 2022.

The euro has sunk to multi-decade lows against the dollar, while the British pound is now hitting new lows. Further, the yen has been all over the map.

The US Dollar

Quarterly and daily chart of the US dollar index (DXY).

Chart courtesy of TradingView.com

As you can see on the quarterly and daily charts above, the dollar index — the DXY — has been robust. For several years, it traded between $103 as resistance and $90 support.

In the second quarter, the DXY powered through resistance and it continued its breakout this quarter. While the Fed has been aggressive with its rate hikes, other central banks are starting to catch up.

Will that limit the dollar’s strength going forward? 

If the Fed pumps the brakes while other central banks ratchet up their rate hikes, then it should. But there’s no guarantee that will be the case.

I do find it noteworthy that the DXY is hitting channel resistance on the daily chart, while also at the 161.8% breakout level on the quarterly chart. In those respects, we may be due for a rest.

However, traders and investors must note that the DXY is in a very clear uptrend. Until that trend breaks, we can’t look at this as a bearish setup.

Should it pull back, I’m looking at $110 to $110.50 as a first layer of support, with uptrend support and the 50-day acting as a stronger support zone.

On the upside, a continuation higher puts $120 in play, which was multi-year resistance in the early 2000s, followed by the 261.8% extension up near $129.

Trading The British Pound

Quarterly and daily chart of the British pound (GBPUSD).

Chart courtesy of TradingView.com

The British Pound seems to have everyone’s attention this morning.

As you can see on the daily chart to the right, the pound has had quite a bit of volatility over the last two sessions. At today’s low, the British pound was down almost 8% in two days against the US dollar. From its one-month high, it was down 13% against the dollar.

That volatility is not normal — especially for a currency like the pound.

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So far, the pound is bouncing. It’s hitting downtrend support (blue line), as well as the tagging the lows from the 1980s.

It was a reasonable bounce area and it’s been a fierce bounce at that. From here, British pound bulls need to see the currency regain the 2020 low near 1.14, followed by prior support in the 1.20 to 1.21 zone.

If it can’t do that, the trend is not yet constructive for the bulls. Below 1.10 to 1.14 and the low near 1.035 remains vulnerable. 

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