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US Dollar Index (DXY) Forecast: Did You Feel The Bears Tremble?

US Dollar Index (DXY) Forecast: Did You Feel The Bears Tremble?

2018-05-09 16:30:00
Tyler Yell, CMT, Currency Strategist
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US Dollar Index (DXY) Talking Points:

  • The ONE Thing: Evidence builds for US Dollar bulls. On Wednesday, the DXY rose for the fourth straight session, and both developed and developing economies are feeling the pinch. While this likely isn’t a start to a massive sell-off in EM assets, it does suggest the pricing could continue as the ‘great divergence’ between the US economy and the world plays on.
  • US Dollar Index Technical Analysis: The US Dollar tagged the 93-handle on Wednesday for the first time in 2018. The argument that the DXY is overbought relative to the longer-term trend is true in a technical sense, but above 92.04 (Ichimoku 9-day midpoint), it is difficult to argue that the USD uptrend is over.
  • The ‘dollar carry’ is a theme picking up steam where USD FX forwards now yield substantially more than other G10 currencies across a low volatility backdrop that may help the USD remain supported despite likely shallow pullbacks.

“In the land of the blind, the one-eyed man is kind.” –attributed to Erasmus of Rotterdam, a 16th-century Dutch Renaissance humanist

The quote has an air of truth to the current landscape of the FX market. Central banks that were previously seen a sure-lock to tighten monetary policy are now on the fence. Most notably, European growth has turned for the worse, and the probability of a Bank of England rate hike on Thursday is at less than 15%.

While not often referenced, NZ Dollar rate 3-month cross-currency swaps are trading at a premium for the first time since 2000. The translation is that interest rate differentials know favor the US over the NZ economy has broken parity. The last time this happened the rate was 0.40 compared to today’s 0.6981. Tonight will also feature the RBNZ, which should add some color and potentially some volatility to the pair.

On the contrary, markets are currently pricing in a ~50% probability that the Fed hikes four times this year per Fed Funds futures spreads. That may help to explain the recent US Dollar strength alongside the steadily rising US Treasury 10-yr yield that is looking comfortable north of 3%, which should allay recession fears.

Lastly, decoupling has become a word du jour regarding macro markets. In short, while the US economy is not tearing the cover off the ball (forgive the baseball term) when compared to the global economy per the Citi Economic Surprise Index (blue area below) it’s easy to see why asset managers are shifting funds to USD denominated assets and thus helping to boost the US Dollar.

A 'Decoupling' Of Economic Surprises Is Helping The US Dollar

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Data source: Bloomberg, Citi

Technical Focus on US Dollar Index: Resistance? Maybe. Top? I don’t Know About That.

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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 pushed to fresh 2018 highs this morning ahead of a rather weak PPI. However, the US Dollar train looks to roll-on higher from here, for now. Traders should, of course, watch EUR/USD, which is testing the 55-WMA, but a break below would favor a move down to 1.17/15. For now, when looking at the available evidence (aside from being overbought per RSI) it’s hard to say the trend higher in the US Dollar Index will be over anytime soon.

As a trader, I’m holding a long bias while managing risk. As an analyst, it’s fair to say that above the 9-day midpoint at 92.04; it’s premature to shift from Bullish to neutral. Even a break below the 9-day midpoint would keep me neutral as opposed to bearish on only a break below the 26-day midpoint at 90.94 would make a valid argument that the steep gains from mid-April are about to receded.

In summary, absent a close above these levels and further weakness in the EUR, JPY, GBP, & EM makes the upside a compelling place to trade toward yet.

Not familiar with Ichimoku? You’re not alone and in luck. I created a free guide for you here

Recommended Reading: 4 Effective Trading Indicators Every Trader Should Know

Insight from IG Client Positioning: Traders are trimming bets that the EUR has bottomed, and from a contrarian view that may add to USD resistance.

 US Dollar Index (DXY) Forecast: Did You Feel The Bears Tremble?

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

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.

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

TO READ MORE:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

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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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