What’s next for the US dollar ahead of the election?

What’s next for the US dollar ahead of the election?

As the FED strives to maintain confidence in US markets, all eyes are now focused on the US dollar in the run to the US elections, and with so many factors driving sentiment, each and every one could be a factor. This week alone sees eighteen comments from FED members, and with the pandemic continuing to dominate, the death of US Supreme Court judge Ruth Bader Ginsburg, this too has added a significant twist to the possible outcome.

All of this and much more will play out in the US dollar over the next few weeks, and with it languishing in the low 90’s on the daily chart, from a technical perspective, it has the potential to regain the 100 handle once more, a level not seen since May.

00:01

Introduction and trading disclaimer

00:01

The speaker apologizes for the delayed start caused by distractions at home. They briefly mention the focus of the session, which is forex trading during the London session. A reminder about the trading disclaimer is given, emphasizing that trading involves significant risks.

00:35

Volume price analysis overview

00:35

The speaker advises never to risk money you cannot afford to lose and introduces a new series aimed at newcomers. The focus is on analyzing forex markets using volume price analysis, a method combining price action and volume to assess the authenticity of price movements. This approach helps identify reversals and breakaway trades by interpreting market participation. The methodology is presented as unique and effective for building trading consistency and confidence, incorporating elements like support and resistance, candle patterns, and timing.

02:03

Capital markets interrelationships

02:03

The speaker discusses their approach to market analysis, which goes beyond just technical chart reading to include fundamental factors like news releases. They emphasize the interconnectedness of the four main capital markets: forex, bonds, equities, and commodities. These markets influence each other, and currency pairs in the forex market can reflect or confirm movements in other markets. The traditional practice of focusing solely on one chart or timeframe is outdated, as traders now consider broader market sentiment and relationships among different markets.

03:42

The speaker reflects on how they have been analyzing these cross-market relationships for five to six years to better understand money flow and market sentiment. They point out that forex is often a leading indicator because it reacts faster than other markets. Observing where money flows across markets helps traders gauge risk, reward, and overall sentiment effectively.

04:17

Currency strength indicators explained

04:17

The speaker introduces a set of indicators developed by Quantum Trading to identify significant currency movements, such as dramatic buying of the Japanese yen, the dollar, or the Swiss franc. The primary tool discussed is the currency strength indicator, which tracks the flow into individual currencies and helps determine whether a currency is overbought or oversold, signaling potential reversals. Using multiple time frames, these indicators highlight potential trades and warn against trading during congestion periods. Additional tools include the matrix, which classifies the strongest and weakest currency pairs; the currency array, which measures trend strength; and the heat map, which visually summarizes all 20 currency pairs across multiple time frames. These tools aim to simplify analysis by reducing the need to monitor numerous charts. The segment ends by noting upcoming fundamental events, such as Governor Bailey’s speech and other end-of-month factors.

06:20

End of month and quarter market factors

06:20

At the end of the month and quarter, US equity fund managers must rebalance their portfolios of equities and bonds. The recent equity market sell-off, driven by multiple factors including the virus, has caused significant volatility, which is expected to increase. Fund managers are required to sell assets that have overperformed to maintain balance. Additionally, unique factors such as the Japanese yen’s invoicing practices—where exporters invoice in local currency, leading to large currency exposures—also influence market dynamics during this period.

08:05

Japanese yen and US dollar insights

08:05

The discussion highlights the significant impact of foreign currency flows, particularly noting that large exchanges typically occur in March and September. The Japanese yen is considered both a safe haven currency and influenced by seasonal factors. Attention is also drawn to the US dollar, which has recently gained strong demand, evidenced by increased buying and a rising dollar index. Additionally, numerous Federal Reserve speeches scheduled this week, including one by Jay Powell, emphasize the importance of understanding central bank communications in currency markets.

09:11

US election and supreme court impact

09:11

The speaker discusses the complex factors influencing market sentiment, highlighting the upcoming U.S. election and the recent vacancy on the Supreme Court caused by Ruth Bader Ginsburg’s death. The Republicans aim to fill her seat with a conservative justice, which is significant given the uncertain and closely contested nature of the election. The Supreme Court’s potential role in resolving election disputes adds to market uncertainty.

10:23

Concerns about the U.S. election include postal voting issues and the possibility that a Republican-leaning Supreme Court could influence any contested results. The market reacts negatively to this uncertainty. Investment banks are preparing for various scenarios, including delayed election outcomes, reflecting the unpredictable environment.

11:28

Beyond political uncertainties, the ongoing impact of the virus continues to affect markets. Trading opportunities exist, but price movements must be understood within the broader context of these significant external factors. The speaker and a colleague have developed a resource to help navigate this complex landscape.

12:03

Dollar market structure and trends

12:03

The discussion begins with an overview of a comprehensive program designed to explain market movements, focusing initially on the US dollar. The dollar remains a powerful global currency and primary reserve currency despite criticism from some countries. Its strength and movements are influenced by political factors, such as the US administration’s stance, exemplified by Trump’s dissatisfaction with a strong dollar due to its impact on exports.

13:13

The dollar has generally declined since the start of the year, with a small rally around May. Since July, it has mostly moved sideways around the 90-91 level, establishing a base rather than continuing to fall. This sideways movement reflects a lack of clear directional bias, indicated by fluctuating trend signals and congestion phases on charts, which traders need to consider when analyzing the market.

14:14

The sideways trading range signifies a congestion phase, but trading opportunities still exist on shorter time frames. A recent significant move attempted to break away from this volume-controlled range, showing reasonable volume and some pullback. Despite this, the bias appears to remain slightly bullish as indicated by overnight and morning activity in the dollar’s hourly chart.

15:16

The dollar’s upward movement is influencing other currencies, notably the Japanese yen and Swiss franc, both considered safe-haven currencies. The yen also serves as a funding currency for risky assets, and its rise alongside the Swiss franc suggests cautious market sentiment. These three currencies are currently being bought, reflecting risk aversion in the market.

16:23

There is a notable divergence among currency movements, with few pairs clustered in the middle, indicating weak overall directional momentum. The market may be awaiting fundamental news, suggesting a potentially quiet trading period. The speaker also introduces an upcoming focus on the British pound (Cable), noting its significant decline corresponding with the dollar’s rise.

16:49

Cable pair analysis and trading tips

16:49

The speaker discusses analyzing a currency pair, specifically cable (GBP/USD), emphasizing that price movements don’t happen in straight lines but instead move, congest, and then decide direction. Indicators like the volume point of control (VPOC) are useful, as they highlight support or resistance levels following significant moves in the primary trend.

17:46

Using the array of 28 currency pairs, the speaker explains how filtering for strong movers reveals pairs like USDCAD, AUDUSD, cable, and NZDUSD. This approach shows money flow into individual currencies and helps traders anticipate chart behavior. The indicators also provide insights into what to trade and what to avoid, offering a clear mental picture of market conditions.

18:52

The speaker advises taking screenshots of these indicators near the end of trading sessions to review market activity. Using the hourly chart as an example, they identify strong dollar buying, shifting yen movements, and increased euro buying tied to equities popping up. Despite activity in euro-dollar pairs, the best trades in majors yesterday were in cable and the New Zealand dollar.

20:33

Focusing on cable’s 30-minute chart, the speaker highlights the value of NinjaTrader for real-time local time charts and annotation capabilities. Key levels like the volume point of control at 1.29 and strong resistance from accumulation/distribution indicators are identified. These thickened lines visually represent strong price levels requiring momentum and volume to break through.

21:34

The speaker describes typical price behavior emerging from the Asian trading session, with congestion phases followed by attempts to rise during the London session. However, strong resistance regions limit upward movement, demonstrating how volume and momentum are critical in overcoming these price barriers.

22:05

Volume point of control in trading

22:05

The volume point of control serves as a dynamic support and resistance level by marking volume over time, highlighting congestion phases. Around 8 o’clock, significant volatility and volume spikes occur, followed by an attempt to rise. Volume Price Analysis (VPA) becomes crucial here to interpret these movements and corrections.

22:42

On the 30-minute chart, analyzing volume during corrections or pullbacks helps predict the extent of price retracements. Falling volume during a pullback suggests limited downside movement. This is confirmed by a subsequent bullish engulfing candle, indicating the continuation of the prevailing trend.

23:15

To assess the possibility of rejoining the primary trend, traders examine volume, candle patterns, and support/resistance levels. A bullish engulfing candle breaking through volume support and approaching a low volume node signals a potential fast move. Traders must decide their aggression level when interpreting these signals.

23:47

Low volume nodes, where the volume histogram narrows significantly, indicate areas where price can move quickly if broken. Observations show that price fell through such a narrow volume region with minimal volume support, facilitating a rapid decline. This underscores the importance of identifying these low volume areas in trading.

24:25

The price drop lacked volume support and was accompanied by volatility spikes beyond the average true range, confirming strong downward momentum. The price failed to find support at a minor support line, suggesting continued weakness. Traders must consider these factors when deciding to enter or exit trades.

25:01

Traders can choose to follow candle patterns or wait for clear breaks of support levels before entering trades. Timing is critical since many markets operate 24 hours, allowing flexibility in trade entry. Patience in waiting for confirmation can improve trade decisions within the volume and support/resistance framework.

25:33

Trading sessions and timing importance

25:33

The speaker explains that although traders may want to trade whenever they like, the forex market is divided into specific sessions such as the European open, London open around 7 AM, mid-morning periods, and the U.S. open including the London fix. These sessions mark key turning points where significant market moves occur, allowing traders to structure their trading day around them and not worry if they miss a move because another opportunity will arise during the next session.

27:12

The discussion shifts to analyzing price action using different chart timeframes. The speaker focuses on a slower 30-minute chart to provide context for a recent downward move and subsequent rally attempt. They emphasize the importance of using multiple timeframes for trading decisions, such as combining 1-5 minute charts for scalping with a benchmark 30-minute or hourly chart to identify primary trends and avoid trading against them. The CSI indicator is mentioned as a tool to detect trend direction.

28:16

The speaker describes observing the end of a price move and deciding when to take profits after gaining about 30 to 40 pips. They note a resumption of the downward move, with the volume profile (VP) shifting lower and key price levels adjusting accordingly. The importance of volume, price action, and key levels such as the week’s low and Camarilla levels is stressed to understand market hierarchy and guide trading decisions.

29:21

The current market situation for the currency pair ‘cable’ (GBP/USD) is summarized as a move lower reaching the S3 support level, which sometimes signals a potential reversal. The speaker reviews Renko charts with a 60-second timeframe and a brick value of 4.5, explaining that higher brick values indicate a slowing market momentum. These indicators provide insights into the market’s speed and strength, helping traders assess whether moves are fast or grinding, with reversals typically being slow and steady.

30:32

Price action and market maker traps

30:32

The speaker discusses a congestion phase in the market starting from Europe around 7 o’clock, noting a potential reversal at the S3 level. They highlight the London session as a critical time when insiders and market makers often trap traders on the wrong side of the market. The focus is on trading the British pound (Cable), emphasizing the benefit of setting up individual currency pairs on charts to avoid distraction from other currencies. This approach helps reduce trader regret by maintaining focus on preferred pairs and avoiding missed opportunities elsewhere.

 

By Anna Coulling – creator of volume price analysis