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US Dollar Forecast: Bulls on Parade? Not Quite - Key Levels for DXY Index

US Dollar Forecast: Bulls on Parade? Not Quite - Key Levels for DXY Index

US Dollar Forecast Overview:

  • The US Dollar started off 2020 strong but has failed to capitalize on gains in the first half of January.
  • The DXY Index remains below the downtrend from the September and November 2019 highs, while also holding below the rising trendline from the 2018 and 2019 swing lows. remains intact.
  • The DXY Index
  • Retail trader positioning suggests that the US Dollar may reverse in the coming days.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

US Dollar Looks for a Catalyst

The US Dollar is…bored. That’s an odd way to describe a currency, but personifying the world’s reserve currency is a useful exercise. The torrent of news flow – the US-China trade war deal, US-Iranian geopolitical tensions, the Trump impeachment – has done nothing to move the US Dollar in a meaningful way. This ‘bored’ price action is an expression of complacency among market participants, who have seemingly become tone deaf to any red flashing headline across their trading screens.

US Treasury Yield Curve Rather Quiet

The US Treasury yield curve has not been a source of excitement at the start of 2020. In fact, over the past month – going back to mid-December – tenors in the range of 1-month to 10-years have seen less than a 10-bps move. All things considered, considering the relatively large moves in US yields over the past year, the lack of movement over the past few weeks has deprived the US Dollar of a significant catalyst.

US Treasury Yield Curve: 1-month to 30-years (January 15, 2020) (Chart 1)

The lack of movement in US Treasury yields is neither a good nor bad factor for the US Dollar at present time; neither helping nor hurting. But like a coiling spring, an inevitable release of kinetic energy is due; a violent swing in US yields will likely drag the US Dollar along the for the ride.

Fed Rate Cut Timing Not Budging

The Federal Reserve’s had made evident that we are currently at a pause in its rate cut cycle. To this end, Fed Chair Jerome Powell has indicated that there is a near-zero chance of a rate hike anytime soon. Much like the BOC and the ECB, the Fed is in a wait-and-see period for monetary policy.

Federal Reserve Interest Rate Expectations (January 15, 2020) (Table 1)

According to Fed funds futures, market participants are not expecting any change in policy the next few months, taking cues from the Fed chair. There is an 88% chance of a hold at the January Fed meeting, and there is a 70% chance that interest rates do not change through July 2020. If the Federal Reserve moves on interest rates, then November 2020 is being pegged as the most likely month (67% chance).

Eurodollar Contracts See Diminished Fed Rate Cut Cycle

We can measure whether a rate cut is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Eurodollar contracts continue to be closely aligned with Fed funds regarding the scope and scale of the Fed rate cut cycle.

The chart below showcases the difference in borrowing costs – the spreads – for the continuous front month/January 20 (orange) and the continuous front month/June 20 (blue), in order to gauge where interest rates are headed over the course of 2020.

Eurodollar Contract Spreads – Continuous Front Month/June 20 (Orange), Continuous Front Month/December 20 (Blue) (January 2019 to January 2020) (Chart 2)

Based on the Eurodollar contract spreads, there is there is a 24% chance of a 25-bps rate cut by mid-year; Fed funds are pricing in a 14% chance of a 25-bps by the time the June Fed meeting comes around. Currently, according to Eurodollar spreads, there is a 62% of a 25-bps rate cut by the end of the year.


The DXY Index’s momentum profile is starting to shift to a more bearish tone; the series of lower highs and lower lows remains. The DXY Indexhas returned to the daily 5-, 8- 13-, and 21-EMA envelope, which failed to realign in bullish sequential order. Slow Stochastics attempted to climb into overbought territory but failed, while daily MACD is now curtailing its rise in bearish territory. The US Dollar’s major topping potential is still in play.


The more time that the DXY Index spends outside of its rising wedge, the greater the likelihood of a breakdown. And yet, if there is no follow through to the downside, bears will become discouraged and bulls will become reinvigorated. But given the scope of Fed rate pricing, it would appears that the ‘dovish’ case has already been fully priced-out; a rise in Fed rate cut odds (pulling forward the date from November closer to present day) would be a poor development for the US Dollar.


Despite the lack of movement in US Treasury yields, the rates-sensitive USD/JPY has been able to continue it’s climb higher. (A simple explanation: US equities have risen as the US-China trade war has plateaued, reducing demand for the Asian safe haven currency.) But USD/JPY’s advance through 109.73, the December 2019 swing high, represents an important break higher.

If USD/JPY is able to clear 110.25 by the end of January 2020, it would constitute a breakout from the descending trendline from the June 2020 and September 2020 highs. The path of least resistance may yet be higher.

IG Client Sentiment Index: USD/JPY RATE Forecast (January 15, 2020) (Chart 6)

USD/JPY: Retail trader data shows 34.88% of traders are net-long with the ratio of traders short to long at 1.87 to 1. The number of traders net-long is 4.92% lower than yesterday and 8.15% lower from last week, while the number of traders net-short is 9.26% higher than yesterday and 79.26% higher from last week.

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

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

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

To contact Christopher Vecchio, e-mail at

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

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