Pick a winner by picking a loser

With a barren economic calendar this week, there is some question about whether currency traders ought to even show up for work this week. In the early hours of the open this Sunday, I am seeing signs that most traders that wanted a position probably already have one.

I would like you to consider that we are in the calm of a U.S. dollar storm, and we need to think about what is going to kick us out of equilibrium. Lately there has been a lot of mixed news on the dollar, and therefore we have seen a lot of channeling. For a while in May, I thought we would be stuck in this cyclone forever. But if we take last Friday’s news about payrolls and think about its implications, I think we may have a big win this week. Jobs were a disappointment but wages increased. In a way, both of these were somewhat bad news. Higher inflation from higher wages means more potential for an inverted yield curve. Slower job growth can mean an end to interest rate hikes and puts even more pressure on next month’s numbers.

In the end, we have to consider not just what has happened in the past but the probability of something happening in the future. At this point, the probabilities for bad news for the U.S. dollar are piling up. Take a look at the EUR/USD chart below.

Source: Prophet.net

A cup-and-handle continuation pattern provides further technical evidence that the U.S. dollar may struggle into the 1.3000—1.3200 range. The breakout I am looking for could easily happen this week. Look for a break above 1.2850 to take positions. Some minor news about consumer credit on Monday and trade on Wednesday could trigger the rally we need to justify a long position. Just remember, you can make just as much money picking a currency that is struggling as finding one that is soaring.

Pick a winner on Monday by looking for losers!