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Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

2020-05-25 12:30:00
Christopher Vecchio, CFA, Senior Strategist
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Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

Technical Forecast for the US Dollar: Neutral

  • EUR/USD rates can’t quite get legs beneath them during their breakout, while GBP/USD remains tilted to the downside and USD/JPY tracks global equity markets higher. The net-result is a US Dollar (via the DXY Index) that continues to trade sideways.
  • The holiday-shortened week will soon give way to deluge of critical US economic data in the first week of June, lending to the notion that the next few days will likely see the DXY Index consolidation sustained.
  • The IG Client Sentiment Index suggests that retail traders are adjusting their US Dollar positioning in EUR/USD, GBP/USD, and USD/JPY rates.
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US Dollar’s Trapped in Suspended Disbelief

The US Dollar (via the DXY Index) has made little movement in recent weeks, coiling into an ever tightening consolidation that portends at a breakout opportunity down the road. The holiday-shortened week will soon give way to deluge of critical US economic data in the first week of June, lending to the notion that the next few days will likely see the DXY Index consolidation sustained.

Yet for the time being, even as the United States continues to deal with the worst outbreak of the coronavirus pandemic among developed economies, with the death toll surpassing 100,000, the sheer fact that the Federal Reserve’s balance sheet has now swelled past $7 trillion has market participants overlooking the near-term losses, both in economic and human terms.

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

Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

The DXY Index’s lack of direction in recent weeks has led to an ever-tightening consolidation, perhaps in the form of a symmetrical triangle. Concurrently, momentum has tailed off and there is no prevailing bias at this present time. Both daily MACD and Slow Stochastics are hovering at their respective signal and median lines, while price is now just above its daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order.

The fact of the matter is that the DXY Index has not traded beyond the March 26 to 27 high/low range that has since defined support and resistance for the symmetrical triangle over the past two months. It thus stands to reason that until the DXY Index either breaks 101.02 to the topside or 98.27 to the downside, then traders may find better opportunities elsewhere in the near-term.

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

Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

The weekly timeframe underscores 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. At present time, the DXY Index remains within the bearish wedge, although the weekly candle – that of a hammer – suggests that there remains a steady bid below.

US Dollar Net-Long Futures Positioning Edges Up Without DXY Index Rally (Chart 3)

Weekly Technical US Dollar Forecast: Coiling Continues - Watch These DXY Index Levels

Finally, looking at positioning, according to the CFTC’s COT for the week ended May 19, speculators increased their net-long US Dollar positions to 17.3K contracts, up from the 16.5K net-long contracts held in the week prior. Net-long US Dollar positioning has been trending higher every week since the week ending March 24.

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

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