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US Dollar Drops on Fiscal Stimulus Talks - Range Breakout Guiding DXY Index Price Action

US Dollar Drops on Fiscal Stimulus Talks - Range Breakout Guiding DXY Index Price Action

Christopher Vecchio, CFA, Senior Strategist
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US Dollar Forecast Overview:

  • The US Dollar (via the DXY Index) has hit fresh lows amid the latest headlines around US fiscal stimulus talks.
  • The sideways range in the DXY Index has broken to the downside, with prices below the descending trendline from the March and May swing highs as well as the long-term support trendline from the 2011 and 2018 lows.
  • Retail trader positioningsuggests that the US Dollar is on mostly bearish footing versus the Australian Dollar, Canadian Dollar, and Euro.

US Dollar Hurt Again by Falling Real Yields

The US Dollar (via the DXY Index) is hitting fresh lows amid the latest round of news headlines to scroll across trading terminals in the second half of the New York trading session. After quickly moving past the Fed-Treasury fight, Congressional Democrats and Republicans appear to have found common ground on a narrow fiscal stimulus package, one which “will be signed by President Trump,” per outgoing US Treasury Secretary Steve Mnuchin.

Read more: Lending Facilities the Focus on Day Two of Powell, Mnuchin Testimony

Against the backdrop of more promising coronavirus vaccine development news, the US Dollar has been grinding lower as the combination of fresh fiscal stimulus (increasing US deficits) and prolonged low interest rates (per the Federal Reserve, through 2023) has driven down US real yields – a reaction that has time and again hurt the US Dollar throughout 2020.

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DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (August 2011 to December 2020) (CHART 1)

US Dollar Drops on Fiscal Stimulus Talks - Range Breakout Guiding DXY Index Price Action

We’ve been bearish on the DXY Index on a technical basis for several months, and patience is finally seeing through the expected outcome. It has been previously noted that, “although the DXY Index is holding just above the downtrend from the March and May swing highs, time is running out before said trendline meets the multi-month range support…below 91.75 (yearly low), and the DXY Index could quickly see losses accelerate.”

Concurrent with the drop to fresh yearly lows, the DXY Index has also broken down through the 23.6% Fibonacci retracement of the 2018 low/2020 high range and the 38.2% Fibonacci retracement of the 2011 low/2020 high range at 91.93. With momentum indicators pointing significant bearish strength, weekly charts are suggesting that the path of least resistance remains to the downside for the DXY Index.

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DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 2)

US Dollar Drops on Fiscal Stimulus Talks - Range Breakout Guiding DXY Index Price Action

The US Dollar (via the DXY Index) has broken multi-month range support. In our last update, it was noted that “bearish momentum continues to set the tone, with the DXY Index holding below the daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is trending below its signal line, while Slow Stochastics are holding in oversold territory.” These observations remain true today. A simple doubling of the range following the loss of 91.75 suggests that the DXY Index could target as low as 88.75 – not too far from the 2018 low at 88.25.

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IG Client Sentiment Index: EUR/USD RATE Forecast (December 2, 2020) (Chart 3)

US Dollar Drops on Fiscal Stimulus Talks - Range Breakout Guiding DXY Index Price Action

EUR/USD: Retail trader data shows 27.21% of traders are net-long with the ratio of traders short to long at 2.68 to 1. The number of traders net-long is 20.04% higher than yesterday and 17.62% higher from last week, while the number of traders net-short is 2.54% higher than yesterday and 17.13% higher 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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