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Weekly Technical US Dollar Forecast: Finally Turning Higher?

Weekly Technical US Dollar Forecast: Finally Turning Higher?

Christopher Vecchio, CFA, Senior Strategist
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Weekly Technical US Dollar Forecast: Finally Turning Higher?

Technical Forecast for the US Dollar: Neutral

  • The DXY Index has held onto key technical support, suggesting that bulls may have a bit more fight left yet.
  • Net-short US Dollar futures positioning has eased as the DXY Index has rallied, but has not shifted that significantly from levels seen going back to mid-December 2020.
  • The IG Client Sentiment Index suggests that the Euro, the largest component of the DXY Index, has a bearish bias in the near-term.

US Dollar Rates Week in Review

The US Dollar (via the DXY Index) was having lackluster week until Thursday (even as Fed Chair Jerome Powell testified on Capitol Hill), when it seems the uptick in US Treasury yields finally spilled over to FX markets, lifting the greenback through Friday into the weekly close. The DXY Index rallied by +0.57%, its second best weekly performance year-to-date, just behind the second week of January (+0.70%).

The US Dollar gauge warded off a significant technical breakdown, and now it appears that major technical damage is ‘undone,’ to an extent. The arrival of the first week of a new month should bring about the usual uptick in volatility in USD-pairs, thanks in part to elevated event risk.

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US Economic Calendar Week Ahead

The first week of March offers a robust economic calendar, with a global focus during the early part of the week and a US-centric focus to cap things off. There are several items on the calendar that are worth paying attention to from the US Dollar’s perspective, culminating in the March US labor market report on Friday.

- On Monday, the final February US Markit Manufacturing PMI and the February US ISM Manufacturing PMI will be released, as will the January US construction spending figures.

- Fed Governor Lael Brainard will be giving speeches on Monday and Tuesday.

- On Wednesday, the February US ADP employment change report will be released, as will the February US ISM Non-Manufacturing PMI. Later on Wednesday, the Fed Beige Book is due.

- On Thursday, focus swings to US labor markets, with the weekly US jobless claims figures out, as well as the January US factory orders report. Fed Chair Powell will give a speech on Thursday, which will likely focus on recent action in US Treasury yields.

- On Friday, the February US non-farm payrolls report as well as the February US unemployment rate will be released. Later in the day, the US budget plan for fiscal year 2022 will be made public.

For full US economic data forecasts, view the DailyFX economic calendar.

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DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (February 2020 to February 2021) (CHART 1)

Weekly Technical US Dollar Forecast: Finally Turning Higher?

The DXY Index had been clinging onto the downtrend from the March and November 2020 highs, but was finally able to turn higher on Thursday and Friday, breaking the intramonth downtrend in the process. Early-March will prove to be a significant psychological test for the US Dollar, the series of lower highs and lower lows was never broken throughout February. Now, a move over the mid-February swing high of 91.06 would suggest that the turn higher is gaining legitimacy.

Momentum is turning after the abrupt rally in prices. The DXY Index is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily Slow Stochastics are driving higher from oversold territory, while daily MACD is starting to turn higher albeit below its signal line. More choppiness could be ahead, which was more or less the state of affairs throughout February.

DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (February 2011 to February 2021) (CHART 2)

Weekly Technical US Dollar Forecast: Finally Turning Higher?

The longer-term view established in the latter half of December 2020 remains valid: “we thus view the latest development with hesitation, particularly when viewed in context of the longer-term technical damage wrought in recent months; the DXY Index remains below its multi-year uptrend, and could be working on a multi-year double top. So long as the rebound remains below 91.75, the DXY Index outlook remains bearish on a longer-term basis.”

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CFTC COT US Dollar Futures Positioning (February 2020 to February 2021) (Chart 3)

Weekly Technical US Dollar Forecast: Finally Turning Higher?

Next, looking at positioning, according to the CFTC’s COT for the week ended February 23, speculators slightly decreased their net-short US Dollar positions to 13,851 contracts, down from 14,287 contracts held in the week prior. Net-short US Dollar positioning remains near its highest levels since March 2011, when speculators held 15,494 net-short contracts. Positioning is now the least net-short since the first week of December, when speculators held 6,486 contracts.

IG Client Sentiment Index: EUR/USD Rate Forecast (February 28, 2021) (Chart 4)

Weekly Technical US Dollar Forecast: Finally Turning Higher?

EUR/USD: Retail trader data shows 45.61% of traders are net-long with the ratio of traders short to long at 1.19 to 1. The number of traders net-long is 2.36% higher than yesterday and 3.00% lower from last week, while the number of traders net-short is 24.89% lower than yesterday and 24.74% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

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

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

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