‎US Dollar Index (DXY) Talking Points:

  • US Dollar Index Technical Analysis: DXY running into resistance without response favors weakness
  • WH rhetoric expected to escalate on trade with Trump loyalist, Kudlow appointed as WH advisor
  • Trader Sentiment Highlight from IG UK: EUR/USD bearish bias from retail favors upside

Another loyalist joins the ranks of the White House to replace a ‘centrist’ with Larry Kudlow, CNBC-commentator and former economic advisor to President Regan is set to succeed former Goldman Sachs president, Gary Cohn as Trump’s Economic Advisor.

New WH Economic Advisor Kudlow Comes In Hot With Headlines on China and Trade

Oh his home network on Wednesday afternoon, Kudlow let a few headlines fly such as there is no reason to believe Trump does not want a strong dollar to enhance confidence at home and abroad as well as two key insights on China such as:

  • China has earned ‘tough response’ in trade
  • China hasn’t played by the rules for a long time

These points may show that Trump is revamping his team to prepare a tougher stance against China. The only problem is that China has A LOT of leverage to enact the philosophy of ‘Courtesy Before Sword.’ The low hanging fruit, should China look retaliate would likely be through reducing purchases of US soybeans to hurt Trump’s support base of mainland American Farmers or more painfully, US Treasuries at a time when issuance is set to rise on Trump’s fiscal stimulus.

Either way, if China looks to exchange courteous trade language for a sword, they likely have a few sharp ones to swing that could lead to a rising risk premium on the US Dollar.

Rising US Political Risk Appears To Be US Dollar Negative

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Data Source: GeoQuant, Bloomberg

The chart above shows a Political Risk score from GeoQuant that scans for political risk across the G20 overlaid on top of the US Dollar Index (DXY) in orange. The higher score aligns with greater political risk and has also been inversely correlated with US Dollar Index performance. Naturally, should this inverse correlation hold and the trade war rhetoric escalate, which Trump’s new economic advisor looks to be doing before official induction, traders should be on the watch for more US Dollar pressure.

EUR/USD At 57.6% of DXY Weight Sets Up For Key Move After Hedge Funds Adjust Positioning

Traders remain in doubt about what’s next for EUR/USD, but at the same time EUR confidence appears to be waning. Recently, leveraged speculators or Hedge Funds per the CFTC have pulled back on their bullish EUR exposure. However, the trend is clearly favoring EUR gains to USD gains and a resumption of the trend could soon see EUR/USD test 1.26 or higher soon.

CFTC CME EUR FX Leveraged Positioning Since October

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Data Source: CFTC, Bloomberg

Another way to look at the data above is to see that the last time hedge funds had this little net-long exposure to EUR, EUR/USD was trading near 1.20 at the turn of the year. Meanwhile, EUR/USD looks to be tracing out a triangle, which is often a consolidation pattern before the continuation of the broader trend, which on EUR/USD has been higher for months now.

EUR/USD is often analyzed when looking at the US Dollar Index since EUR/USD makes up 57.6% of the Index’s weighting.

Learn about trading triangle patterns here from our resident Elliott Wave expert.

DXY Technical Update – Daily Chart Shows Price Approaching Resistance

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Since Wednesday, January 24, the US Dollar Index has effectively traded sideways. Hedge funds have reduced their US Dollar short positioning, and at the same time the political risk premium seems to be escalating.

From a technical perspective, on the back of such a strong downward move, a sideways move with this backdrop is not encouraging for US Dollar Bulls. Ichimoku Cloud has been added to the Daily DXY chart, and it clearly shows the cloud acting as resistance with momentum per the Chikou Span about to enter back into bearish momentum territory.

A close below 8898, the March opening range low could be the technical trigger to re-ignite the US Dollar short trade that appears to have multiple supporting factors.

Traders not wishing to play the index may want to look at stronger currencies within the G10 right now such as the Australian Dollar, British Pound, or Japanese Yen.

Unlock our Q1 forecast to learn what will drive trends for the US Dollar through 2018!

Insight from IG Client Positioning: Traders are Net-Short Suggesting EURUSD May Rise

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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.

New to FX trading? No worries, we created this guide just for you.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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