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US Dollar Index Rate Forecast: Hedge Funds Fight Recent Drop

US Dollar Index Rate Forecast: Hedge Funds Fight Recent Drop

Tyler Yell, CMT, Currency Strategist

US Dollar Index (DXY) Talking Points:

  • US Dollar Index Technical Analysis: Failure to break above 94.20 in Dec. would be worrisome
  • Fear of broad drop to close out the year would heighten on break and close below 92.50
  • Trader Sentiment Highlight from IG UK: EUR/USD bearish bias from retail weakens

The US Dollar surprised Global Markets in December by bucking an 11-year trend and a hearty 2017 forecast that anticipated gains. Over the last 11-years, the US Dollar has gained in December and 13-months ago, institutions were nearly as confident as they get in anticipating further EUR strength and out of the gate, they looked right. The 9% drop over 2017 for the DXY does seem overdone, and some traders are not sure it will last.

Hedge Funds Attempt to Buy Low

A development worth noting though not a guarantee of gains is that hedge funds have noticed the ‘cheap dollar.’ A look at the number of net speculative institutional bets shows one of the largest divergences between the spot dollar index in at least a year.

Traders should note that hedge funds do not have a flawless record. However, the message behind the numbers is that they see a deal on a potentially oversold USD. The divergence of positioning could lead to one of two likely outcomes. Either a potential breakout as other market participants see the 2017-year-end as way overdone or a flush out of the new longs who are proven wrong that leads to a strong breakdown that takes the Dollar Index to the 2011 high of 89.61 ( a ~2.5% drop from current levels) or toward 87.25 (a ~5% drop). Trade should also not hold their breath until a break and close above 94.16 develops.

Fed Minutes Fail to Lure Buyers

A few positive developments are that the Fed Minutes released on Wednesday was the evidence that the Fed does not appear concerned about the backdrop of the economy that would warrant a slowdown of hikes. Additionally, the yields of the US Treasury 10-yr Note rose to 2.47% as the odds for a March Fed rate hike rose from 68% to 76% after the minutes.

DXY Technical Update

The technical pictures encourage traders to heed momentum and favor downside for now. The dollar struggles persist, and despite likely being driven by year-end and year-open flows. Short-term resistance is at 92.25/35 (Dec 31 and Jan 3 high) and further at 92.50 (late November low). Below these levels, momentum prevails.

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

Unlock our Q1 forecast to learn what will drive trends for the US Dollar in the new year!

Insight from IG Client Positioning: Pickup in short positioning favors support of price advance

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

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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 further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.

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

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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.

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