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US DOLLAR Technical Analysis: Support Showing Fault Lines

US DOLLAR Technical Analysis: Support Showing Fault Lines

2016-02-11 15:40:00
Tyler Yell, CMT, Currency Strategist
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Interested In our Analyst’s Longer-Term Dollar Outlook? Be sure to sign up for our free dollar guide here.

Talking Points:

  • US Dollar Technical Strategy: US Dollar near Weakest G10 FX Currency Favors Shorts
  • Probability of Fed Hike Is Vanishing Alongside US Dollar Bulls
  • Seasonal Tendencies Favor USDWeakness for February, Score one for seasonality

The hits keep coming for the US Dollar. Janet Yellen came off the first day of her testimony as dovish and persistently concerned about global growth, which could further delay prospects of a Fed Rate Hike.

To see how FXCM traders are positioned after such a big move, click here.

Right now, there is a sparring of sorts among economists and markets (markets are usually right), about whether the Fed will hike this year. Many economists are still expecting a few hikes, albeit less than four showed on the Fed Dot Plot while the Fed Futures market shows little faith in a hike through February 2017. This market reality has led to an offered US Dollar.

US DOLLAR Technical Analysis: Support Showing Fault Lines

Now, after an overheating in US Dollar in late January thanks to an equal weighting to AUD, EUR, JPY, & GBP, and the Bank of Japan’s negative interest rate action, markets have sold the US Dollar. The US Dollar was easily the strongest currency to end January and have switched places with GBP within the G10 this February with the weakest currency. Currently, the Japanese Yen is the strongest currency within the G10, and the strength isn’t slowing down as the topping pattern looks to be scaring many JPY bears.

Key Levels: Watch the Recent Pivot to Hold

The pattern on the chart above looks like a bearish rising wedge pattern. Such a bearish pattern favors a retracement of 61.8-100% of the wedge. A price break below wedge support would turn focus lower toward 11,891-11,634 respectively. The lower high of 12,156 should remain a key focus for Bulls wanting to test the water on the long side.

While many comparisons have been made to the 2008 in debt and equity markets, a worthy mentioned would also be the US Dollar. Before the bottom fell out in late 2008, the US Dollar fell 8.5% in January-March 2008. We are only half-way through a similar drop, and should history repeat itself; it would favor more downside to go.

Another development worth watching has been the drop in US 2yr yields. US 2yr yields have nearly erased its 4Q rise as markets fear rates set by the Fed will stay lower for longer. A break on the US 2yr Yield below the October low of 0.5379 would likely align with further US Dollar weakness.

T.Y.

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