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Weekly US Dollar Forecast: Technical Outlook Suffers Setbacks after FOMC

Weekly US Dollar Forecast: Technical Outlook Suffers Setbacks after FOMC

2020-05-03 15:00:00
Christopher Vecchio, CFA, Senior Strategist
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Technical Forecast for the US Dollar: Bearish

  • The US Dollar (via the DXY Index) continues to experience significant volatility, having just experienced its third-worst performing week since the coronavirus pandemic began impacting global financial markets.
  • Potential breakouts in EUR/USD and USD/JPY rates may drag the DXY Index lower, although GBP/USD rates may not participate.
  • The IG Client Sentiment Index suggests that retail traders are beginning to add to their US Dollar longs.
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US Dollar’s Haven Appeal

The US Dollar’s role as a safe haven currency has been in the spotlight for the past few weeks, and in turn, this appeal may be hurting its standing as risk appetite has improved. But it’s not just that: as the United States bears one of the worst results of the coronavirus pandemic while parts of developed economies in Asia and Europe begin to re-open in earnest, traders have begun to shift out of the US Dollar as there may be more appealing near-term investment opportunities elsewhere.

For any given economy, a stretch of time defined by its equity markets falling, government bond yields rising, and currency depreciating would be concerning. And yet that is exactly what the US economy just went through over the past week. We’ll see if this is the start of a new, concerning trend, or simply a one-off.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (MAY 2019 to MAY 2020) (CHART 1)

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The US Dollar (via the DXY Index) has largely been disconnected from its major driver, the US Treasury yield curve, as the Federal Reserve’s extraordinary monetary policies in response to the coronavirus pandemic have dampened volatility across bond markets, corporates and governments alike.

Yet the near-term price action is concerning, given the DXY Index’s lack of direction in recent yielding a symmetrical triangle, which has finally appeared to break to the downside. As the DXY Index has moved lower, bearish momentum has intensified. Daily MACD has started to decline below its signal line, while Slow Stochastics has quickly fallen towards oversold territory. The daily 5-, 8-, 13-, and 21-EMA envelope is in bearish sequential order.

Having breached the April lows, a return to the late-March swing low (98.27) isn’t out of the question in the near-term, followed by the rising trendline from the February 2018 and January 2020 swing lows as well as the 61.8% retracement of the 2017 high to 2018 low range (97.87).

DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (NOVEMBER 2016 to MAY 2020) (CHART 2)

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The weekly timeframe is illuminating with respect to the ‘wait-and-see’ approach to the DXY Index. Since the start of March, there have been moves both above resistance and below support in the bearish rising wedge in place since mid-2017, and at present time, the DXY Index is sitting right back within the more conservative interpretation of the bearish rising wedge (support drawn from the February 2018 and January 2020 lows).

The more aggressive interpretation of the bearish rising wedge (support drawn from the February 2018 and July 2019 lows) suggests that recent price action represents a failed attempt to ward off the breakdown. To this end, a bearish piercing candle formed on the weekly timeframe as the calendar turned into May, cutting below the weekly 4-, 13-, and 26-EMAs moving at the same time. The longer-term timeframe is ominous for the US Dollar.

US Dollar Net-Long Futures Positioning Edges Higher Despite DXY Index Losses (Chart 3)

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Finally, looking at positioning, according to the CFTC’s COT for the week ended April 28, speculators increased their net-long US Dollar positions to 16.1K contracts, up from the 15.6K net-long contracts held in the week prior. Net-long US Dollar positioning has slowly been edging higher over the past fives weeks following the sharp selloff in mid-February.

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

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