Bearish Outlook on the US dollar – July 27, 2010

Here’s an update of the US dollar index or the USDX which I last posted on July 15 (kindly see my last blog here). As you can see from the chart, the index has continued to weaken after it broke its long term uptrend line and the 61.8% Fibonacci retracement level that I drew. At present, the index is trading just above 82.000. A move below this could send it lower to 81.000 or even 80.000. But in case the dollar buying makes a comeback and the index breaks above the short term uptrend line, it could rise further until it hits a resistance at the former uptrend line. A pass through the former uptrend line, though, could send it back to its previous peak at around 88.000.

The highlight of this week for the greenback is the advance second quarter GDP release of the US on Friday, July 30. Several economists from financial firms like Bloomberg, JPMorgan Chase & Co., and UBS Securities have already downgraded their forecast on the country growth from the months of April to June of this year. The US economy is now only seen to have expanded by 2.5% after posting a growth of 2.7% during the first leg of the year. And I guess I agree with the mentioned growth downgrade. For one, the country’s retail sales figures have contracted both in May and June. The core retail sales June have continued to lose by 0.1% after already weakening by 1.2% during the previous month. Similarly, the headline retail sales have also lost 0.5% in the same period on top 1.1% contraction during the last. Note that more than 70% of the US’s GDP is composed of domestic consumption. A huge fraction of this is then represented in the country’s retail sales figures. Hence, a drop in the latter could likewise reflect negatively on the US’s overall output.

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