US Dollar Index Forecast: DXY Jumps As FOMC Allows Inflation Breakout
US Dollar Index (DXY) Talking Points:
- US Dollar Index Technical Analysis: Pullback appears likely, but support anticipated at 91.11-90.56 zone. Such a pullback could bring a trader a cleaner place to enter on a market potentially early in its breakout phase or at the beginning of wave three of a five wave bullish sequence
- The unwind of US Dollar short positions per the CFTC report may mean the upside has room to run and Wednesday’s FOMC statement showed the Federal Reserve is allowing for an overshoot of inflation.
- Trader Sentiment Highlight from IG UK: jump in XAU/USDbullish bias indirectlyfavors upside. Per Intermarket analysis, Gold tends to move inversely to US Dollar Index, and the bearish bias may mean the US Dollar may move higher yet or that pullbacks may remain shallow.
A boring FOMC statement may have been the best thing US Dollar bulls could have experienced on Wednesday. Despite a ripping commodities market that could easily continue to take inflation expectations higher, the Fed opted to remove the statement, “But the Committee is monitoring inflation developments closely.”
On initial release of the statement, the Dollar dropped, but this should not be expected to be the start of a new trend as global data as evidenced by China and Europe at the beginning of the year continue to disappoint.
One key way to see the divergence is via the Citi Economic Surprise Index (CESI) of the US Economy and the global economy as a whole. The decoupling of the stable, though less robust US Economy while the global economy may provide another boon for the US Dollar to strengthen.
US Economy Isn't Catching The World's Economic Cold
Data source: Citi, Bloomberg
If the US CESI starts to show robust moves higher as the global economy economic disappoints continue, then the fundamental argument for capital flows into the US that strengthens the US Dollar may also continue and take the US Dollar higher yet.
Technical Focus on US Dollar Index: No Ordinary Correction
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
Unlock our Q2 forecast to learn what will drive trends for the US Dollar through 2018!
The US Dollar Index is pushing above the 200-DMA at 91.98, and on Wednesday traded at a new 2018 high. The breakout higher could cause a further unwind in the massive US Dollar short trade that saw institutions with the largest aggregate position betting on USD weakness in nearly six years per the CFTC.
Given the strength of the move higher, traders would likely do best to focus on likely support points on a probable retracement level. With RSI(5) showing the highest reading since early 2016, a pull-back should not scare-off longer-term US Dollar bulls.
Utilizing Ichimoku, a likely support point would be the 9- & 26-day midpoint or Tenkan-sen and Kijun-sen that are at 91.11-90.56 respectively. Only a move lower would open up the probability that the retracement went too far too fast, and money is being taken off the table by institutions.
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For now, it looks like the global cost of a US Dollar is going to remain on a steep slope higher.
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Insight from IG Client Positioning: Traders are further net-long Gold, which holds an inverse relationship to the direction of the US Dollar
XAU/USD sentiment is analyzed for insight since XAU/USD is inversely correlated to DXY.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold 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 Spot Gold-bearish contrarian trading bias (emphasis mine.)
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---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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