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US Dollar Closing Strong Quarter Leaves USD Bears in Doubt

US Dollar Closing Strong Quarter Leaves USD Bears in Doubt

Tyler Yell, CMT, Currency Strategist

US Dollar Index (DXY) Talking Points:

  • The ONE Thing: The US Dollar continues to be the envy of the G10. Quarter-to-Date returns against the rest of the world show the Canadian Dollar is the best performing currency against the US Dollar in Q2 by only falling 2.6% against the greenback. The Euro & British Pound has fallen 6.05 and 6.63% respectively.
  • Repatriation has market participants on both sides of the fence about its effects on the US Dollar, and its potential direction. The Fed’s flow of funds data shows ~$660B of capital sent back into the US from non-financial firms at the start of the year, which may have second-order effects on the US Dollar. Last time the US saw such an inflow of USD was in 2005 where the DXY gained 13% on the year.
  • Technical Outlook on the US Dollar: 95 has long been a key ceiling that traders have been watching on a rebound in the US dollar after it hit a low in February. The market trades at spot 94.92, while EUR/USD sits at the key support of 1.15. The start of Q3 should provide some key direction and bias for US Dollar Traders.

Baby, Come Home

US Dollars are homeward bound at an unprecedented rate in Q2 2018. Data from the Federal Reserve shows a sharp net-inflow of USD from non-Financial US Firms.

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Source: Bloomberg, Federal Reserve

BAML's Head of Rates Has 'Never Been More Bullish on US'

Some may say the US Dollar rebound is simply a game of catch up or a reversion to the mean. In February, the DXY traded to the lowest level since 2014 as funds were coming onboard, but the question is whether this flow will continue and in so doing, help offset the US’ large current account deficit, which is the argument of Bank of America’s Senior FX strategist Ben Randol et al.

Another of Randol’s colleague’s, David Woo, the rates guru also feels that the US economy is on a roll and the momentum may keep the US ahead of its counterparts. Woo summarized the view on a Bloomberg interview that in his ~22 year career, that he's 'never been more bullish on the US economy.'

Despite the Gains in Q2, DXY Direction Remains In Doubt

The US Dollar had an outstanding Q2 with many traders giving credence to the belief that President Trump’s tough talk on trade and tariff’s helped bolster the US Dollar after it traded to the lowest level since 2014 in February.

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

Technically Speaking - US Dollar Index

The most important move in the US Dollar may not have been the strong extension in May, but rather the higher low posted in March that led to the current rally. From the higher low in March on Bullish RSI Divergence, the US Dollar has been a force that no other global currency has been able to stop.

US Dollar Index Daily Chart: Two Aggressive Trend Bounces

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

Looking at the chart above, the two levels that should stand out are 93.79 and 92.90. These levels are acting as price support, and the candlestick data visualization show that trend continuation was aggressive at these levels.

The continuation of a trend should provide insight into the likely closure of counter trend or short positions and the initiation of long positions that right now are in the money. Only a move below these levels would convince me in the face of the information above about capital inflows that the trend is set for a broader retracement.

The next broad upside target sits at 95.87, the 50% retracement of the 2017-2018 range. Should the price hold above 93.79, the target getting hit may simply be a matter of time.

Recommended Reading: 4 Effective Trading Indicators Every Trader Should Know

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

More For Your Trading

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.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---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.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.