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It’s Still Too Early to Call a Bottom in the US Dollar

It’s Still Too Early to Call a Bottom in the US Dollar

Christopher Vecchio, CFA,

Talking Points:

- A potential bottoming pattern, a bullish morning doji star, formed in the DXY Index this week but has seen no follow through today.

- Likewise, EUR/USD bearish evening doji star - highlighted by a bearish key reversal yesterday - has seen little follow through today either.

- Retail trader sentiment suggests a mixed trading environment for the US Dollar through the end of the week.

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After a promising close on Wednesday, the US Dollar is disappointing bottom pickers on Thursday with a weak performance thus far half way through the trading day.

A bullish daily key reversal in the DXY Index yesterday, coupled with the bullish morning doji star candle cluster between Monday and Wednesday, suggested that the greenback's early-year losses may have run their course.

Price Chart 1: DXY Index Daily Timeframe (September 2017 to January 2018)

Evidently not. The US Dollar finds itself trading lower once again today, unable to generate the follow through necessary to declare that the bottoming process had truly begun. The seeds of a turnaround have been planted elsewhere, it should be noted.

US economic data has been generally outperforming expectations, with the Citi Economic Surprise Index up at +70.0. Medium-term inflation expectations, as measured by the 5-year, 5-year inflation swap forwards, are nearing their 2018 high and their highest levels since last May near 2.36%. The US Treasury 10-year yield is quickly approaching its highest level since March 2017. Accordingly, Fed funds are pricing in an 89% chance of a rate hike by March.

For now, it's too early to call the bottom in the US Dollar, but traders should be on the lookout for evidence in price action that a short-term turn could be coming soon.

Read more: Bitcoin, Cryptocurrency Market Crash on Fears of Demand Drawdown

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

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