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Talking Points:

Traders hoping to gain an understanding of the LT direction of the USD would do well to keep an eye on the Trendline connecting higher lows since 2014. Currently, DXY is showing good Trendline support over the longer-term near 98.50. The test of the 3-year Trendline aligns with long-term seasonality studies where DXY has risen in 9 of the past ten years. However, recent momentum in past months have been disappointing DXY bulls, and the EUR is a key reason why DXY fails to gain upside traction.

Much of the EUR downside since 2014, when DXY took off higher on the chart below, has been exasperated by fears of “what’s next?,” for the Euro. However, a look at the options market will show you that over the next two months, the 25-delta risk reversal is trading at its highest levels for the year. In other words, options traders have never worried less about EUR downside relative to the USD this year, which could keep EUR/USD trading higher on average.

Any traders with an upside bias on DXY should continue to watch this Trendline support. Ichimoku currently favors downside momentum continuing and there remains hard resistance at the gap high after the first round of the French Presidential election when EUR/USD gapped over the weekend by its largest margin ever from 1.0750 to ~1.0900.

Despite the Federal Reserve’s forecast to continuing raising the interest rate in the US, with a stable longer-term U.S. rate outlook, and a stabilizing outlook in the Eurozone, we could continue to see upside in EUR/USD and downside in DXY. Such a development would be confirmed with a weekly close below 98.50 (current spot of 3-yr Trendline) on DXY that would likely silence the DXY bears for a while. Only a close above 100.68 on DXY would change the trend outlook.

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DXY Gaps To 2017 Lows After The First Round of the French Election on April 23

DXY Supported by Favorable Seasonality & 3-yr Trendline

Chart Created by Tyler Yell, CMT

Sentiment Highlight: EUR (57.6% of DXY) Sentiment Favoring Further Upside

DXY Supported by Favorable Seasonality & 3-yr Trendline

EURUSD: As of May 8, retail trader data shows 40.5% of traders are net-long with the ratio of traders short to long at 1.47 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06042; theprice has moved 3.1% higher since then. The percentage of traders net-long is now its highest since Apr 20 when EURUSD traded near 1.07144. The number of traders net-long is 54.5% higher than yesterday and 22.0% higher from last week, while the number of traders net-short is 9.0% higher than yesterday and 11.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise.Traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse lower despite the fact traders remain net-short. (Emphasis mine)

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Shorter-Term DXY Technical Levels: Monday, May 8, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

DXY Supported by Favorable Seasonality & 3-yr Trendline

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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