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US Dollar Technical Analysis: Next Pullback Will Tell Traders Much

US Dollar Technical Analysis: Next Pullback Will Tell Traders Much

Tyler Yell, CMT, Currency Strategist

US Dollar Index (DXY) Key Points:

  • The ONE Thing: Despite a supportive message at Jackson Hole, the US Dollar sold off. There are a few things that one could point to (I for one, choose China,) but regardless, the hot-handed US Economy may have outrun the pack with little gas left in the tank as speculators are holding their longest positions in a year and recent performance over the last few months has been waning. If the US Economy can not continue to outperform at this out-of-character pace, we could see a softer US Dollar ahead.
  • The risk for a December hike being downgraded to a hold continues to be on the table as chairman Powell voiced doubts on the reliability of neutral or * rages like that of unemployment and the reference cash rate. The next two months will likely be critical in how the Fed sees the domestic and international effects of the tightening cycle hitting full stride.
  • Technical Outlook on the US Dollar: The US Dollar is seeing its sharpest pullback after touching technical resistance mid-month at 97. The Dollar Index has pulled back by 2.4% despite hawkish talk from Fed members. The key question on the charts will be as to whether the next move higher in US Dollar will result in a lower-high that is followed by the next big breakdown.

Can the rest of the world continue to disappoint enough to support the US Dollar? That’s the question US Dollar Index (DXY) bulls likely need to be questioning themselves. Recently, I argued that traders should be aware of the steps that China has taken to support the Renminbi and can see more information on this analyst pick, Despite the Ongoing Global Trade War, USD/CNH May Have Topped.

As China has strengthened the Renminbi, the EUR is also staging a comeback of sorts after a modest move above the 55-DMA could trigger a move to the head-and-shoulder neckline of 1.1785 with building bullish momentum.

Monday’s drop in the US Dollar showed that even constructive rhetoric from Fed governors was/ has not been enough to lift the greenback that has struggled since Trump complained about Powell not being an ‘easy money’ Fed Chairman.

Extreme speculative positioning continues in DXY per Paul Robinson’s weekly report. Positive developments elsewhere could lead to a material pullback in DXY longs that could lead to a price pullback toward key support that is seen best on the US Dollar price chart.

Will Leveraged Funds Continue To Chase A Weakening USD?

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Data source: CoT: Bullish USD Bets Continue to Grow as Trend Comes into Question

Unlock our Q3 forecast to learn what will drive trends for the US Dollar through the rest of2018!

Technically Speaking – US Dollar Breakdown Is Gaining Steam

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

After appearing to be made of Kevlar (or your favorite indestructible service,) the potential for the US Economy and the US Dollar to outperform expectations seem to be declining. The main takeaway from Jackson Hole for traders was that hikes by the Fed are fully priced in as further confidence seemed only to lead to more USD selling.

On the chart above, you can see the US Dollar is working on its sharpest drop since February when it was on its way to trading sub-88. Now, traders should be concerned that a broader drop is in the works as speculators were recently noted as being as long US Dollar’s as they have in a year.

As a technically-driven FX trader, the most important development for me to watch is what happens on the immediate pull-back. If we see a weak, three-waved pull-back higher that is limited to 95.30 before resuming lower, then we could see multiple weeks or more of US Dollar weakness that could lead to opportunities in beat-up currencies like the Australian Dollar despite improving fundamentals.

We’ll see.

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

Resources to Support Your FX Trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 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.

---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.

Talk markets on twitter @ForexYell

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

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