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Talking Points:
- US Dollar Index Technical Strategy: Anticipating further upside above 92.55/82
- Market shift of ECB expectations opens road for further USD gains
- Sentiment Highlight: EUR/USD bearish bias from retail gives warning for further DXY weakness
The European Central Bank may have set the table for US Dollar Bulls to enjoy a fine fourth quarter this week.
On Thursday, President Mario Draghi caused a major shift in positioning as evidenced from multiple markets that were pricing in EUR strength over the coming quarters unwinding. The takeaways from Thursday was an assurance from the ECB was that the market should not worry about ECB rate hikes, which was something the market was pricing in before the meeting. Draghi also discouraged the use of the word taper (the wind-down of QE) as the ECB will be looking to provide substantial market support going forward, which caused the EUR to eventually fall below 1.16 and the DXY to break above 95.
This week, the US Dollar has traded to a three month high with sentiment rising and favoring further DXY strength going forward. On the charts, the significant development this week was the close above the confluence of resistance near 94.20. The zone around there combined three different technical focuses. First, the mid-August corrective/lower high was at 94.15 followed by a 161.8% extension at 94.20 of the initial move higher when the DXY was seen as too oversold in early September given possible rate hikes at 91.01 to the September 14 high of 92.65. Lastly, a price channel that has framed price action for most of 2017 also predicted price pressure developing above 94. The close this week that accounted for the highest weekly gain of 2017 likely indicates a shift in behavior toward the DXY?
From here, only a daily close below 92.66would open the door for challenging the current Bullish reversal. The first key upside focus is 95.25 (61.8% retracement of the June-September range.) Alternatively, a reversal back below the 92.66 exposes a likely continuation of the downtrend that would first target 91.53 (Sept. 20 low, first corrective higher low.)
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Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions
Insight from IG Client Positioning: Pickup in long positioning favors resistance on price advance
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
EUR/USD sentiment is analyzed for insight since EUR/USD makes up 57.6% of DXY.
EURUSD: Retail trader data shows 40.7% of traders are net-long with the ratio of traders short to long at 1.46 to 1. The number of traders net-long is 22.8% higher than yesterday and 18.0% higher from last week, while the number of traders net-short is 5.2% lower than yesterday and 2.7% 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. Yet 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 added.)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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