US Dollar Eyes Fresh Highs, but Caution Warranted on Illiquid Trading

• EURUSD – Euro Eyes Fresh Lows versus US Dollar
• GBPUSD – British Pound Forecast to Drop Further
• USDJPY – Yen Outlook Unclear on Mixed Sentiment
• USDCHF – Swiss Franc Shows Mixed Positioning, Outlook
• USDCAD – Canadian Dollar Forecast to Depreciate
• GBPJPY – British Pound Declines May Continue vs. JPY

Forex trading crowds continue selling the US Dollar (ticker: USDOLLAR) as the currency sets multi-month peaks. We use crowd sentiment as a contrarian indicator and expect that the USD could further strengthen through the end of 2011.

We expect that the US Dollar could hit fresh peaks into Friday’s close. Yet fresh USD long positions (EURUSD, GBPUSD shorts) look a bit risky as the risk of short-term correction is quite high. We expect limited volatility into the final two weeks of the year, and as such the USD may actually consolidate through the foreseeable future.

Speculators quite often close positions into the illiquid final weeks of the year and start of the New Year. According to most recent FX Options and Futures data, speculators were heavily net-long the USD. We could see the Greenback slump if leveraged traders cover their long positions.

View an FXCM Expo presentation on the Speculative Sentiment Index for better understanding on how we use it in our trading.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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