U.S. Dollar Could be in for "Much More Pain" says Bank of America

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The Dollar is likely to correct downwards against a basket of currencies before year-end, according to technical analysts at Bank of America Merrill Lynch, who've warned the U.S. currency could be in for "much more pain" if a key level of support gives way over the coming months. 

Bank of America's call comes as the Dollar rebounded from election-induced losses seen Wednesday. The currency appeared Friday as if it's on a collision course with early November highs, which were last seen in mid-2017. 

Price action over coming days will confirm if the greenback is in the process of forming what is known in some parts of the financial world as an "ABC correction" on the charts.

If price action does confirm an ABC pattern, the U.S. currency will be vulnerable to losses going into the New Year, which could easily snowball from there. 

"The uptrend since the Q1 triangle base nearly reached the 61.8% retracement (1215) of the 2017-2018 down trend. This peak at 1212 could be the end of wave V of the uptrend signaling a corrective period into year end. If this is the case, we expect the BBDXY will correct lower in an ABC decline to 1173-1180, or about 2-2.5% from current levels," says Paul Ciana, a technical strategist at Bank of America. 

Above: Bloomberg Markets graph showing Bloomberg Dollar index.

Ciana refers to the Bloomberg Dollar index, which is different to many other indices of the currency but moves in an almost identical fashion.  

But the Bloomberg index faltered, reversed course and headed lower briefly during noon trading in London Friday, after striking the 1,207 level earlier on. 

This is notable because Ciana says it "resolving lower into the end of the week" would be a strong signal that a downward correction is on the way. 

"Provided a correction is this shallow, the bullish head and shoulders base will remain valid and part of our view for 2019. However if the trend line connecting the right should lows breaks, the USD could be in for much more pain," Ciana writes, in a note to clients Friday. 

Above: Bank of America graph showing technical analysis of Bloomberg USD index.

Ciana warned clients that if the Bloomberg Dollar index falls below 1,173 then it would indicate further, much steeper, losses are likely over the coming months.

He doesn't say exactly how far the index could fall but suggests that, as a minimum, it would then drop back below the 1,150 level that represents the upward sloping trendline that has been in place ever since 2011. 

In short, a fall beneath 1,173 during the months ahead would be likely to bring about a regime change that impacts all of the major U.S. Dollar exchange rates. 

That would be good news for anybody looking to buy Dollars on the cheap during the quarters ahead, but bad news for those who have Dollars and will be seeking to exchange them for other currencies by that time. 

The Bloomberg Dollar index has risen by a total of 4.08% in 2018 after reversing what was once a 4% year-to-date loss, which was wracked up mostly during the first quarter.

A superior performance from the stimulus-supported U.S. economy has been behind the move, because it enabled the Federal Reserve to go on raising its interest rate this year.

U.S. growth picked up just as economies elsewhere in the world slowed and their respective central banks signalled to markets that they intend to continue sitting on their hands for the foreseeable future. 

This trend could eventually reverse, although analysts say such a thing would first require clear signs that U.S. economic momentum is fading, or that growth in Europe and other parts of the world is beginning to accelerate once again. 

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