Talking Points:
- The Euro is coming off of extreme bullish sentiment readings, which suggest that buyers are exhausted and profit taking is due.
- A move in EUR/USD below 1.1700 would increase the likelihood of a DXY Index break above 94.29, the July 26 outside engulfing bar.
- Retail crowd positioning continues to shift as the US Dollar rebound has gathered pace in August.
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Despite trading softer around the July FOMC minutes release yesterday, the US Dollar has proven resilient over the past 24-hours, having erased all of Tuesday's losses. While the greenback's technical posture is improving, the DXY Index has yet to clear a key technical level required before we can say that the US Dollar has bottomed in the near-term.
With that said, the continued struggle by EUR/USD to maintain its rally is seen as good news for the DXY Index. After all, the Euro constitutes 57.6% of DXY. A quick examination of the daily timeframe suggests EUR/USD has been treating the former August 2015 high at 1.1714 as support over the past three weeks. A close below said level would also constitute a break of the uptrend from the June and July 2017 swing lows.
Should EUR/USD trade lower and provide the boost the DXY Index needs, a look at three separate sentiment indicators, including our in-house sentiment reading, suggest that the Euro is coming off of a bullish extreme in sentiment (which supports the notion of EUR/USD topping). Market positioning would dictate that any weakness in the Euro in the near-term would be of the profit taking variety.
Even though positioning has moderated in recent weeks, the Euro long trade remains crowded (relatively speaking). According to the CFTC’s latest COT report, there were 93.7K net-long contracts held by speculators in the futures market for the week ended August 8, just off of the highest level since the week ended May 3, 2011 (when EUR/USD peaked just below 1.5000).
Another indicator derived from the futures market suggests Euro sentiment is coming off of a bullish extreme. The Daily Sentiment Index (DSI), which 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 August 4, Euro DSI has fallen from 93% to 74% yesterday, suggesting that a near-term topping process is under way.
See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, and Gold.
Read more: Here’s When We’ll Know the US Dollar Has Bottomed
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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