Has the Dollar become too dull to trade? The GBPUSD pair used to be my number one trade, with an average daily range in excess of 200 pips. Now it’s as popular as a sneezing pig.

The Dollar has even passed the ’safe haven’ mantle over to the Yen. So what’s going on and when can we expect a decent trade again?

My last piece on currencies in July (Current Situations In Forex) tentatively favoured a weaker Dollar, suggesting a test of $1.66 for GBPUSD and, if the EURUSD could break its downtrend line, a re-test of $1.4330.

Patience was definitely the order of the day/week, but prices did eventually break their binding and hit both levels, pushing further to make new 2009 highs.

That was it! Sterling tested $1.70 and the Euro floundered at $1.4450, before someone shot them with a tranquiliser and the whole thing returned to its summer slumber.

Where next? Well, far removed from the debate about long term capital flows and printing presses are two short opposing views:

Bullish Divergence
Yesterday’s piece (Should I Be Selling Stockmarkets Yet?) showed all too clearly the early warning given to the Dax and S&P from bearish RSI divergences . Check out the Dollar Index chart, kindly provided by Barcharts:

Note that whilst the Dollar was hitting a new low in August the RSI made a higher low than the previous fall in May. The thing is, the bullish divergence isn’t a reversal signal; it’s an amber warning light to look out for confirmation from something like a candle pattern, or the break of a trend line or moving average.

The chart shows the index breaking above its 20-day moving average, but coming up against resistance in the form of the 50-day MAV and the big figure 80. Perhaps enough to close out short Dollar positions, but not conclusive enough to go long yet.

The Dollar Doesn’t Like Autumn
I always wondered why Americans called autumn ‘the fall’, but it’s obvious; it’s based on the Dollar. Check out the seasonal chart, kindly supplied by Dimitri at seasonalcharts.com .

Historically, after a trendless summer (and it’s certainly been that) the Dollar plummets right through to Christmas. Now, this is a seasonal average with a reasonable history, but to add some balance look at the weekly chart for the past four years.

OK, so the Dollar fell in 2006 and 2007, but Sterling did its conkers last year and the Dollar had the upper hand, to a lesser extent, in 2005. So, on recent history the evidence isn’t conclusive.

Any Other Influences?
The obvious ones are commodities and equities. I think traders are using the Yen as the main proxy for anti-risk, but a loss in global confidence would undoubtedly help the Dollar against most currencies.

As for commodities, they seem to be part of a circular equation, where three investment markets take turns at being the chicken or the egg. Yesterday I thought the spike up in crude oil was responsible for higher equities and a lower dollar. Last night I read an oil report saying that crude had responded to renewed confidence from rising equities. Hurricane Bill is expected to miss the Gulf of Mexico, but an already jumpy oil price will have knock-on effects for the Dollar.

GBPUSD
Have you got much planned for the next two weeks, because it looks like the GBPUSD is getting closer to a breakout. Although the price has failed miserably to move above the 21-day moving average, an imperfect ascending triangle is looking to force the issue over the next week or so.

The thing is, I’d been favouring a break to the downside, what with the 21-day MAV starting to tip over and a falling RSI. But, the theory is that an ascending triangle favours a break to the upside. What makes it more interesting is that you could argue that we had the break to the upside at the end of July – and it failed. Either way, the triangle is going to run out of space some time very soon.

A break to the upside ought to see a rush for the previous $1.70 high, then it’s a matter of how much of last year’s fall traders want to claw back.

I reckon a few of the big boys are range trading this pair so a trip down to the low $1.63s will probably be met with buying orders. But if it can break that level I’d see a move down to test support at $1.60 and then the 38.2% Fibonacci level at $1.5731.

EURUSD
The Euro has been in a steady decline during August; like Sterling it’s struggled to hold the 21-day moving average and is currently sandwiched between that and the 50-day moving average at $1.4090. There’s quite a bit of work to do around here to break a good uptrend line and that’s why, with traders lounging on their sun beds in Italy or Spain, the trading range is dying.

There’s a minor head and shoulders pattern that woke a few people up, but the neckline break was countered by the uptrend line and any excitement fizzled out.

The bullish ascending triangle carries the same arguments as the GBPUSD pair; a break higher will look to retake $1.4450 almost immediately then target December’s brief high at $1.47.

If the trend line breaks I think the first test will be support at the big figure $1.40 and after that the 38.2% Fibonacci level at $1.3690.

Conclusion
Trading isn’t just about placing bets; it’s about being patient (sometimes very patient) and waiting for a good opportunity. One of life’s certainties, along with death, taxes and Alex Ferguson complaining, is that the Dollar doesn’t stay quiet for long. And with the high level of short Dollar bets in place, a move in the opposite direction could wake a sleeping giant.

Trend lines are one of the simplest, but most reliable, forms of technical analysis, so I wouldn’t bet against the upside move until a confirmed break below. Either way, there should be enough pips in the next move to reward a few more days’ patience.

Watch this space…