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Here’s When We’ll Know the US Dollar Has Bottomed

Here’s When We’ll Know the US Dollar Has Bottomed

Talking Points:

- DXY Index continues to trade below outside engulfing bar from July 26; a break of the high at 94.29 would mark a 'higher low.'

- In a sign of momentum shifting back in the US Dollar's favor, EUR/USD closed below the daily 13-EMA yesterday for the first time since June 27.

- Retail crowd positioning continues to shift as the US Dollar rebound has gathered pace in August.

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The US Dollar continues to grind higher versus most of its major counterparts, as a clear effort at establishing a short-term bottom is under way. Certainly, after yesterday's July US Advance Retail Sales report and subsequent revision higher to the Atlanta Fed's GDPNow growth tracker for Q3'17 (from +3.5% to +3.7%), it appears that economic data momentum is starting to shift in a more favorable direction for the US Dollar.

It might not take all that much for a short-term US Dollar bottom to be established, given how extremely bearish sentiment is for the US Dollar in general. One way to see how sentiment is starting to shift is to look at the Daily Sentiment Index, or DSI.

The DSI aggregates the opinions of active traders in US futures markets, is measured on a scale of 0-100%. High readings (i.e. greater than 90%) suggest that a short-term top is developing or has been made while low readings (i.e. less than 10%) suggest that a short term bottom is developing or has been made. Since the start of August, the DSI has evolved as if it were suggesting a bottom in the US Dollar, with DSI increasing from 6% to 24%.

Accordingly, we'll look no further than the July 26 outside engulfing bar swing high at 94.29 as the key level the DXY Index needs to break in order to say that the US Dollar has indeed established a short-term bottom. At this point, the series of 'lower highs and lower lows' since the end of June would be broken, and in context of sentiment and positioning (which according to the CFTC's COT report, is the most bearish US Dollar six years), would suggest that we've seen the exhaustion low.

While the economic calendar is dotted with a few meaningful data releases today, market participants will be focusing in on the July FOMC meeting minutes set to be released at 14 EDT/18 GMT today. It was at this meeting that the Fed began to raise concern over consistently underwhelming inflation numbers; yet it was also at this meeting that the Fed indicated that it could begin its balance sheet normalization process in September. Depending upon which point of view the market latches on to today will determine how the US Dollar reacts to the minutes' release.

See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, GBP/JPY, and Gold.

Read more: US Dollar Rebound Gathers Pace versus British Pound, Japanese Yen

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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Follow him on Twitter at @CVecchioFX

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