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US Dollar Index Attempts to Breakout As Next Big Move Could Guide ’18

US Dollar Index Attempts to Breakout As Next Big Move Could Guide ’18

Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • US Dollar Index Technical Strategy: Failure to break above 94.20 in Dec. would be worrisome
  • 2018 could continue to see a focus on growth and MonPol normalization outside of US
  • Sentiment Highlight: EUR/USD bearish bias from retail weakens, DXY may see strength

Given the horrible performance of the Dollar Index in 2017 relative to expectations going into the year, it’s fair to ask the following. Can the dollar index hold above 90, a level not traded at since 2014 as the ‘shock & awe’ of monetary policy normalization gets outsourced to other central banks.

A tailwind for the USD in 2014 has become a headwind in 2017 and possibly beyond. The initial boost was the emergence of widespread economic growth. The green shoots caused the Federal Reserve to hint at normalization that began with the rate hike of 2015 and the simple forecasting of normalizing caused the USD to gain ~20% in July 2014 through January 2017. However, the growth has spread (as central bankers hoped it would), and now the central banks that are hinting at possible normalization are the ECB and BoJ, which in turn, may see their respective currencies see the same type of outperformance in 2018 that the DXY did in 2014-Jan 2017. The ECB has already seen the EUR (57.6% of the Dollar Index Weighting) rise 10.6% this year and further gains would likely weigh down on the Dollar Index, which has fallen by 9.5% YTD.

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

The charts can be a helpful guide, but the fundamental backdrop suggests that global growth is helping other currencies much more than the US Dollar despite a hawkish Federal Reserve, which has already been priced into the market. Another argument for the lack of US Dollar upside is seen in the flattening US yield curve between the US Treasury 2 and ten-year security. The flattening yields show a tightening Federal Reserve on the front end as investors are unwilling to sell off the longer-dateddebt for fear that growth and inflation measures will soon fade.

When looking at the chart below, the key zone worth watching is the 200-DMA on the four-hour chart (93.95 and a level that had our previous attention, 94.20. A daily price break and close above that level would indicate short-term strength if nothing else as it would break the series of lowerlows and lower highs were seen since October. A break above this zone would likely be triggered by JPY weakness as risk-sentiment remains positive and the GBP outlook remains uncertain with unfolding Brexit negotiations with a current focus around the Irish border to be discussed on December 14.

The counter view would be a break below the November low near 92.50. A break and close below would likely set the stage for a negative start to 2018, and what could altogether be another poor year if the yield curve continues to flatten and global growth that the Fed has already recognized and implemented into monetary policy plans forces other Central Banks to pull away from their QE regimes.

Unlock our Q4 forecast to learn what will drive trends for the US Dollar through year-end!

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

EUR/USD sentiment is analyzed for insight since EUR/USD makes up 57.6% of DXY.

EURUSD: Retail trader data shows 38.4% of traders are net-long with the ratio of traders short to long at 1.61 to 1. The number of traders net-long is 30.0% higher than yesterday and 12.2% higher from last week, while the number of traders net-short is 4.3% higher than yesterday and 15.0% 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.)


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

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Contact and discuss markets with Tyler on Twitter: @ForexYell

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