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‎US Dollar Index (DXY) Forecast: This Unwind Could Get Ugly Fast

‎US Dollar Index (DXY) Forecast: This Unwind Could Get Ugly Fast

2018-04-23 22:03:00
Tyler Yell, CMT, Currency Strategist
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US Dollar Index (DXY) Talking Points:

  • US Dollar Index Technical Analysis: DXY is approaching important resistance, 38.2% of Nov-Feb Range at 90.60
  • CFTC data shows institutional short positions on USD rose to multi-year highs against USD
  • Trader Sentiment Highlight from IG UK: waning EUR/USD bearish bias favors ST downside
  • Recommended Reading: Crude Oil Prices Eye $71 and EURUSD Bears are Biting Their Nails

The trading week opened with US Dollar gains continue to bleed through multiple facets of the FX market. The reason for such sharp counter-trend gains is in a word, positioning. Specifically, Sterling long positions against the US Dollar reached their most extreme point against the US Dollar per futures positioning in nearly four years. Similarly, the percentile of EUR longs relative to the institutional positioning posture over the 52-weeks reached its most extreme measure.

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Article source: CoT Update – GBP/USD Speculative Long Largest in Almost 4 Years

Looking at the 52-wk Range (Percentile) column above in the far left you can infer how extreme the short positioning was against the US Dollar. Such a positioning environment sets up a scenario similar to everyone standing on one side of a boat in stormy waters. A flip is nearly inevitable if the currents are strong enough, and last week they were.

The currents came in the form of inflation fears thanks to commodities like Crude Oil and Aluminum, key inflation factors breaking out to multi-year highs with a backdrop that doesn’t seem to provide any relief anytime soon. Traders and market watchers were able to visualize this fear with a move toward 3% on the US Treasury 10-year Note Yield.

Looking above at the top 3-positions, which make up nearly ¾ of the US Dollar Index weighting, you can see an extreme long position in EUR, GBP, and JPY futures against the USD relative to positioning over the last year. The CFTC collected this data on Tuesday’s close and published Friday. Regardless of the sharp move higher in US Dollar over the last 5-days, the ~2% gain could be a sign of more to come if the European Central Bank or Bank of Japan doesn’t bring out a rallying cry from EUR & JPY bulls to keep buying against the US Dollar like they have since January 2017.

Unlock our Q2 forecast to learn what will drive trends for the US Dollar through 2018!

Is The US Dollar Set To Trade Higher?

For now, it looks like the short answer is yes. Whether you look at institutional positioning per the CFTC, retail positioning via IG Client Sentiment, or the technical levels that have been broken, traders should prepare for more bleeding in the US Dollar short trade.

DXY Technical Update – Daily Chart Shows Price Approaching Key Juncture

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

The chart above shows the broader trend lower in the US Dollar Index since November 2017. However, since January, there may be a short-term (as of now) bottoming process taking place. Traders much continue to focus on resistance within the move higher that has been very choppy, and currently doesn’t have the backdrop of impulsive gains.

The key resistance points are initially 90.60, the 38.2% retracement of the move from November to February. A break above 90.60 (Monday’s high) would open up a move likely toward the 50%-61.8% retracement of the same range at 91.42-92.24. This 78 pip range should be seen as the US Dollar bear’s last line of defense. Given the extreme positioning, a break above this zone would argue for a much broader unwind of the US Dollar short trade that makes holding the US Dollar bearish view foolish in the immediate sense.

Technical Insight From EUR/USD

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

You’ll notice on the EUR/USD chart above that the price has recently trended to the lower point of the multi-month range into trendline support that should have trader’s attention. A break of this support point at 121.75 makes the positioning extremes above more concerning and could open up a path toward 1.1940 USD per EUR.

The driver behind the approaches to key levels this week appears to be sovereign bond yields. The US 10-year Treasury note yield has approached 3% on Monday and a break could have major effects for the rest of the trading year, and would likely lead to an unwind that may also see the US Dollar strengthen further.

Either way, if US Dollar does strengthen further, traders should watch those markets with the most extreme positioning that are EUR, JPY, GBP, & AUD.

Recommended Reading: 4 Effective Trading Indicators Every Trader Should Know

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

‎US Dollar Index (DXY) Forecast: This Unwind Could Get Ugly Fast

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

Retail trader data shows the percentage of traders net-long EURUSD is now its highest since Feb 14 when EURUSD traded near 1.05781. The number of traders net-long is 20.3% higher than yesterday and 29.4% higher from last week, while the number of traders net-short is 0.9% lower than yesterday and 21.1% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bearish contrarian trading bias (emphasis mine.)

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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