Handbrake applied on the US dollar rally

THE USD/SGD currency pair hit a six-month low of 1.3442 on Jan 31, 2019 with the US Federal Reserve taking a more dovish stance on its monetary policies.

However, prices have been recovering in February largely due to the escalated trade tensions between the US and China, boosting the demand for USD as a safe haven.

As at Feb 14, USDSGD prices have tested the resistance of the downtrend channel at around 1.3600. This downtrend channel had been formed since November 2018 and prices have remained below the resistance level, showing no indication of prices trading above it yet.

In addition, prices are also trading below the 50 and 200 EMAs, indicating weak buying interest. A bearish signal, in the form of the death cross, is also starting to form with the 50 EMA (exponential short-term moving average) beginning to move below the 200 EMA (exponential long-term moving average).

The Stochastics Oscillator, which is a directional indicator as well as a measure of momentum, further affirms that the downtrend remains intact despite the recent short-term recovery.

Levels have since retraced after nearing the overbought levels of 80. It indicates that an impending correction in prices is well due as well. Since November 2018, the stochastics oscillator has proven accurate in confirming the price reversal, and serves as a promising signal that the USD/SGD will continue its descending trajectory.

The next support for this correction will be 1.3443, which is the previous low. This serves as a 1.15 per cent downside potential from current levels.

Should this support be broken, prices could then test the lower band of the channel at 1.339 (1.55 per cent potential downside).

This will be a critical point to look out for, being the bottom of the descending channel, with the bears potentially hoping for a bearish breakout at these levels.

Fundamentally, the US Federal Reserve (Fed) has recently left little doubt that their future direction of monetary policy will be patience and that rate hikes could pause for a while.

In fact, during the latest Federal Open Market Committee (FOMC) meeting, the Fed caught market by surprise by stating that it may wind down its gradual asset-shedding operation sooner than expected.

Hence, with possibly looser monetary policies going forward, the USD will lack the strong catalyst that propelled its strength last year.

Moreover, the US is also facing muted inflation pressures, and there have been ongoing concerns that the recent 35-day partial shutdown of the US government over a budget dispute may further cloud the outlook for the US economy. Thus, by taking both the technical bearishness and the drastic dovish turn in the Fed's stance into consideration, further selling pressure will be imminent, and will quell market expectations towards the USD.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.