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US Dollar at Special Risk of Pullback versus Euro and British Pound

US Dollar at Special Risk of Pullback versus Euro and British Pound

2014-08-18 15:45:00
David Rodriguez, Head of Product
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- US Dollar fails to break significant resistance

- Risk of an important Euro and British Pound reversal is high

- Our focus remains on USD pairs as the Dollar remains the driver

The US Dollar trades in a tight price range versus the Euro and other major currencies, but here’s why we see growing risk of an important USD reversal.

Professional traders have bought aggressively into the recent US Dollar rally versus the Euro and other major counterparts, and the currency’s inability to break key technical resistance leaves it at risk if traders decide to shed USD-long positions.

Indeed, recent Commitment of Traders data shows large speculators are their most long the US Dollar versus the Euro (short EURUSD) since it traded near $1.20 over two years ago. This in itself does not guarantee that the Dollar is at an important turning point. Yet it highlights that many of those traders are likely to get rid of EURUSD-short positions in a hurry and send the Euro sharply higher on a short-covering rally.

Dow Jones FXCM Dollar Index Stalls at key Resistance, Increasing Risk of Pullback

US Dollar at Special Risk of Pullback versus Euro and British Pound

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

In terms of trading strategy we thus look to key resistance levels in the Euro and Sterling in particular. Last week we highlighted similar risks of an important GBPUSD low, and our Senior Market Strategist writes that the Euro is at danger of a “short-squeeze rally”. Staying above $1.3300 keeps our short-term bullish bias intact, while the Sterling should hold key lows at $1.6660 to realistically rally through the foreseeable future.

Of course if traders show fear of a sharp USD reversal they’re not necessarily showing it; forex volatility prices have fallen off of recent multi-month peaks. In short, this suggests that few are betting on or hedging against sharp currency moves through the foreseeable future.

Forex Volatility Prices Show Early Signs of Lasting Reversal

US Dollar at Special Risk of Pullback versus Euro and British Pound

Data source: Bloomberg, DailyFX Calculations

See the table below for full strategy rundown on a per-currency pair basis and keep track of changing conditions with future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

US Dollar at Special Risk of Pullback versus Euro and British PoundUS Dollar at Special Risk of Pullback versus Euro and British Pound

Automate our SSI-based trading strategies via Mirror Trader free of charge

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

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via Twitter at http://www.twitter.com/DRodriguezFX

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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