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US Dollar Forecast: Sell the Rumor, Buy the News? Levels for DXY Index

US Dollar Forecast: Sell the Rumor, Buy the News? Levels for DXY Index

Christopher Vecchio, CFA, Senior Strategist
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US Dollar Forecast Overview:

  • The US Dollar (via the DXY Index) has traded higher, even as US fiscal stimulusis formalized and a government shutdown is avoided.
  • The combination of near-term technicals and fundamentals still suggest that traders are covering short US Dollar exposure rather than opening long positions.
  • Retail trader positioning sees a mixed outlook for EUR/USD, GBP/USD, and USD/JPY rates.

US Dollar Shrugs Off ‘Bad News’

The US Dollar (via the DXY Index) has traded higher, even as US fiscal stimulus is formalized and a government shutdown is avoided. Outgoing US President Donald Trump has signed the bipartisan Congressional agreement, despite reservations expressed last week and failure to sign by an earlier deadline that will upend unemployment benefits to out of work Americans, if only temporarily.

For most corners of the financial world, these developments culminate a ‘buy the rumor, sell the news’ type of situation. Or in the US Dollar’s case, ‘sell the rumor, buy the news.’ Higher deficits (vis-à-vis the new stimulus package) and continued operations on the federal level (via-a-vis avoiding a shutdown) should both, in theory, spur greater risk appetite, with traders jettisoning lower yielding safe haven currencies like the US Dollar.

Even though a US government shutdown has now been avoided, traders aren’t exactly lining up to take on more risk. After all, we’re in that quieter, more illiquid part of the calendar between Christmas and New Year’s, with many traders relegated to the sidelines. The news that are developing are more or less in line with consensus expectations (e.g., it was the base case scenario that US President Trump would sign that Congressional stimulus package).

In a sense, then, nothing has changed. The timing of the calendar – in the midst of the holidays, following a year of prolonged weakness – still suggests that traders simply covering their short positions, not setting up fresh US Dollar longs.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 1)

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It remains an overarching principle that “liquidity thinning out around the holidays, near-term technical developments are less reliable and carry less weight than their longer-term counterparts.” That said, the break of the November-December downtrend has held, and the lows carved out thus far on Monday, December 28 show the daily candle’s wick found support at said trendline before turning higher into a bullish hammer.

Once again, the DXY Index is threatening to break the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD is trending higher, but still below its signal line, while daily Slow Stochastics are heading south, hovering just around the median line. Bearish momentum is fading. This does not necessarily mean a rally is about to develop; we could be looking at another period of sideways trading in the DXY Index in these thin liquidity conditions.

DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (January 2011 to December 2020) (CHART 2)

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Like last week, “we thus view the latest development with hesitation, particularly when viewed in context of the longer-term technical damage wrought in recent months; the DXY Index remains below its multi-year uptrend, and could be working on a multi-year double top. So long as the rebound remains below 91.75, the DXY Index outlook remains bearish on a longer-term basis.”

IG Client Sentiment Index: EUR/USD RATE Forecast (December 28, 2020) (Chart 3)

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EUR/USD: Retail trader data shows 36.01% of traders are net-long with the ratio of traders short to long at 1.78 to 1. The number of traders net-long is 4.68% higher than yesterday and 16.64% higher from last week, while the number of traders net-short is 6.54% higher than yesterday and 0.37% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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