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US DOLLAR Technical Analysis: A No-Win Scenario For US Dollar?

US DOLLAR Technical Analysis: A No-Win Scenario For US Dollar?

Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • US Dollar Technical Strategy: Weakness May Persist Over Coming Months
  • Probability of Fed Hike Is Vanishing Alongside US Dollar Bulls
  • Counter-Currencies In Index Has More Relative Upside Than USD For Now

“Financial stability risks are substantial…Some emerging markets are particularly vulnerable to sharp exchange-rate movements and the effects of high domestic debt.”

Organization for Economic Cooperation and Development, February 18

Hello, are there any Dollar Bulls out there? While the US Dollar likely has not set its cyclical high, the short-term case for a Dollar drop is adding up. In addition to Janet Yellen’s testimony where she admitted they have not taken negative interest rates as a policy option tool off the table, the Fed Minutes show further reluctance to raise interest rates in the near future.

According to the Chicago Merc’s Future’s traders, there is an 83% chance the Fed will not hike before June and a nearly 44% chance we won’t see a single hike in 2016 regardless of the four hikes penciled in on the Fed’s dot plot when they raised rates in December.

The irony of the situation is that the global economy being in a worse spot than the US Dollar sets up a Catch-22 or no-win scenario for the Federal Reserve and subsequently the US Dollar.

In other words, if the Fed keeps their blinder’s on to the economic uncertainty and hikes again, as they did in December, they could do more harm to the emerging market economies with over $24 Trillion in Dollar denominated debt. The US dollar strengthening acts as a global rate hike making USD debt tougher to pay back, which increases the near term doubt of a Fed hike that will likely lead the US Dollar lower.

Interested In our Analyst’s Longer-Term Dollar Outlook? Be sure to sign up for our free dollar guide here.

Key Levels: Watch the 10-Month Trendline

The move lower to start the month or February, a seasonally weak month for the US dollar looks to be a behavioral shift in the US Dollar that is not necessarily finished. Such strong moves lower can, but are not always, indications that there is more downside or against the trend action ahead.

Eight trading days wiped out 3-months of gains in the US Dollar index, and many of the counterparts of the US Dollar index are consistently seeing days of strong gains, which may also show the reprieve in risk may help some of these counterparts even if all are not joining the rally.

Looking to the ICE Dollar Index or DXY shows a triangle formation that favors more downside over the next few weeks. While a triangle formation favors longer-term consolidation ahead of trend resumption, up in the US Dollar’s world, the clarity of trend may continue to be evasive to many traders. Either way, the risks continue to stack up for short-term US Dollar weakness even if the prospects for year-end Dollar strength remain intact.


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