Technical Forecast for the US Dollar: Neutral
- The US Dollar (via the DXY Index) broke its 2021 high and moved up to its highest level since July 2020 following the January Federal Reserve meeting.
- US Dollar net-long positioning increased again, holding near its most net-long level since October 2019.
- The IG Client Sentiment Index suggests that the US Dollar has mostly bullish bias against its three major counterparts.
US Dollar Rates Week in Review
The US Dollar’s final full week of January proved fruitful. The greenback rallied against all of its major counterparts, with the broader DXY Index adding +1.65% on the week, the best weekly performance since the second week of June 2021. Among the components of the DXY Index, USD/SEK and USD/CHF rates produced the biggest moves, adding +2.47% and +2.09%, respectively. The three biggest components of the DXY Index had strong performances, too: EUR/USD fell by -1.73%; USD/JPY added +1.35%; and GBP/USD lost -1.23%. Having cleared its 2021 high, the DXY Index is in bullish breakout territory with signs that momentum is still gathering pace.
For full US economic data forecasts, view the DailyFX economic calendar.
DXY INDEX PRICE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 1)
Two weeks ago it was noted that “support was ultimately found at a familiar area around 94.65/74, where the March 2020 low, September 2020 high, and September to early-November 2021 highs were carved out. The rebound from this critical support region saw the DXY Index retake the June, September, and October 2021 uptrend, suggesting a false bearish breakout transpired. Gains above 96.00 are eyed over the coming days as a confirmation signal that the greenback sell-off has finished.” Since then, the DXY Index has rallied to its highest level since July 2020, gaining ground in seven of the past 10 trading sessions.
Bullish momentum is continuing to gather pace. The DXY Index is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher through its signal line, while daily Slow Stochastics are in overbought territory. Opportunities to buy dips are eyed until the momentum profile reverts.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 2)
Similarly, in the mid-January weekly technical forecast, it was observed that “the daily candlestick on Friday [January 14] has taken the shape of a bearish outside engulfing bar, and coming in after a breakout, means it’s also a bearish key reversal. A move back below 1.1380 would offer a strong confirmation signal that EUR/USD’s bullish breakout as failed.” EUR/USD rates have since broken their 2021 lows and set a new monthly and yearly low for 2022.
Momentum is firmly bearish, with EUR/USD rates below their daily EMA envelope, which is in bearish sequential order. A mirror image of the DXY Index, the pair’s daily MACD and daily Slow Stochastics have crossed below their signal line and into oversold territory, respectively. Selling rallies is the current modus operandi. Ultimately, a move to 1.1000 is eyed in the coming weeks.
IG Client Sentiment Index: EUR/USD Rate Forecast (January 28, 2022) (Chart 3)
EUR/USD: Retail trader data shows 69.57% of traders are net-long with the ratio of traders long to short at 2.29 to 1. The number of traders net-long is 2.15% lower than yesterday and 21.02% higher from last week, while the number of traders net-short is 3.99% lower than yesterday and 25.90% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD 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 EUR/USD-bearish contrarian trading bias.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 4)
GBP/USD rates have lost their footing rather quickly, although the technical setup is not nearly as bearish as that of EUR/USD. Nevertheless, the pair finds itself below its daily EMA envelope, which is likewise in bearish sequential order. While daily Slow Stochastics are in oversold territory, daily MACD has yet to cross below its signal line into bearish territory. A deeper setback is still possible; losses into 1.3170 are possible in the coming weeks.
IG Client Sentiment Index: GBP/USD Rate Forecast (January 28, 2022) (Chart 5)
GBP/USD: Retail trader data shows 58.15% of traders are net-long with the ratio of traders long to short at 1.39 to 1. The number of traders net-long is 1.15% lower than yesterday and 9.51% higher from last week, while the number of traders net-short is 1.13% lower than yesterday and 28.97% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 6)
USD/JPY rates have swung higher once more, continuing their sideways movement that originated in October. The give-and-take between US Treasury yields and US equity markets is mainly responsible for this churn, a dance that is unlikely to end any time soon. As such, a rally back above 116.00 may be seen as an opportunity to sell into range/channel resistance, while dips below 113.50 may be viewed as an opportunity to buy near range/channel support.
IG Client Sentiment Index: USD/JPY Rate Forecast (January 28, 2022) (Chart 7)
USD/JPY: Retail trader data shows 33.49% of traders are net-long with the ratio of traders short to long at 1.99 to 1. The number of traders net-long is 8.41% lower than yesterday and 31.56% lower from last week, while the number of traders net-short is 1.02% lower than yesterday and 17.65% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.
CFTC COT US Dollar Futures Positioning (January 2020 to January 2022) (Chart 8)
Finally, looking at positioning, according to the CFTC’s COT for the week ended January 25, speculators slightly increased their net-long US Dollar positions to 36,830 contracts from 36,402 contracts. Net-long US Dollar positioning remains near its highest level since October 2019, when the DXY Index was trading above 98.00. Positioning remains overcrowded, even as the DXY Index has moved to its highest level since July 2020.
--- Written by Christopher Vecchio, CFA, Senior Strategist
