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US Dollar Index (DXY) Forecast: Could The Stage Be Set For a Rally?

US Dollar Index (DXY) Forecast: Could The Stage Be Set For a Rally?

Tyler Yell, CMT, Currency Strategist

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US Dollar Index (DXY) Talking Points:

  • US Dollar Index Technical Analysis: DXY may have room to recover
  • Hedge funds caught ‘all-in’ on DXY drop as price rebounds remains key upside risk
  • Trader Sentiment Highlight from IG UK: EUR/USD bearish bias from retail favors wanes

The US Dollar Index (DXY) appeared to be on a one-way course as it continued to aggressively fall through most of 2017 and the start of 2018. However, on January 25, after tapping 88.43, we have seen a bounce that has aligned with the global risk-off move.

Now, the DXY is looking to rise for the second straight week,and a few key technical tests await the US Dollar Index at 91, the 38.2% retracement level of the October-January range followed by 92.58, the 61.8% retracement of the same date range.

The Stage May Be Set For a Sharp Retracement By Institutions & Technical Studies

Positioning from leveraged institutions per the CFTC’s Commitment of Trader’s report showed a boost in DXY net-short positions. The acceleration of new short positions over the last two weeks was the most aggressive since 2013. Therefore, weak hands could quickly abandon and buy DXY to neutralize their exposure and help the rally sustain itself further.

DXY Technical Update

The technical focus after such an impressive and impulsive five-wave decline has come to the 61.8% Fibonacci retracement of the 2014-2017 price range at 88.40 as well as the trendline is drawn off the 2011-2014 lows on a log-linear chart.

Given the broad institutional short exposure on the US Dollar Index, and an abrupt shift in the market’s calm, de-risking or position offloading should be watched for to take the US Dollar index higher.

I would caution Dollar bulls from claiming victory too early until the 92.58 level breaks (61.8% retracement of October-January range.) If the dollar breaks back down, traders should keep an eye on EUR/USD (EUR has a 57.6% weighting in the Dollar Index basket) to move toward 1.27/28.

Dollar Index Chart: Price Bounces Aggressively Off Key Fibo Line

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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 through 2018!

Insight from IG Client Positioning on EUR/USD

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

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.

Chat with me about DXY and other markets below!

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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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