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Key Takeaways:
- DXY Technical Strategy: DXY remains in “sell the rips” mode below 96.50
- DXY polarity point of 96.50 remains technical line in the sand, bearish below
- Dollar weakness picks up pace as EUR breaks to fresh 14-month highs
The dollar bear market has picked up the pace today on news that Senate majority leader Mitch McConnell would withdraw the vote for the repeal of Obamacare only to show that the ‘Supermajority’ was great in theory, yet poor in practice. Unfortunately, coming into the year, the US was supposed to be a harbinger for fiscal lead inflation a la China, but the paring back of the Trumpflation trade continues.
As we heard last week from Janet Yellen when she testified to Congress, inflation already is a puzzle, which caused the fixed income market to price in a little more than one hike in 2018 despite the Fed looking to hike three times. When looking at the long-term chart (see below), the market is curbing its enthusiasm that began in July 2014 when the Fed had credibly signaled that normalization was coming.
From July 2014 to early 2017, the DXY rose ~30% in anticipation of the great divide in monetary policy. However, we now see that economic strength and data surprises are not ‘Made in the USA,' but rather in other economies like the Eurozone, Canada, and China. The lack of US growth could mean that the Fed will no longer be the leading central bank in terms of normalization, but possible honing a mea culpa of normalizing too much too soon.
When looking at the chart, you can see that the Dollar is traveling comfortable in a bearish channel and is working to test an internal Trendline drawn from the 2012 peak and the 2016 low. A break below the internal Trendline on a weekly basis would open up the increasing probability of a move to the 38.2% retracement (labeled long-term support) that aligns with the 2016 low at 92.13. Only a daily close above 95.50 would neutralize the current bearish positioning. However, as the blows to hope keep coming for US inflation (despite base metals rallying), I won’t hold my breath in anticipation that the weak USD finds life.
Traders who trade individual pairs are watching to see if EUR/USD can trade to the 2016 high of 1.1616 and the 100-DMA on USD/JPY at 111.78.
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DXY below 96.50 keeps thefocus on downside extension targets @ 92.13, EUR/USD @ 1.16
Chart Created by Tyler Yell, CMT
IG Client Sentiment Highlight: EUR (57.6% of DXY) Sentiment favors further DXY downside
EURUSD: Retail trader data shows 28.1% of traders are net-long with the ratio of traders short to long at 2.56 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06683; theprice has moved 8.6% higher since then. The number of traders net-long is 1.4% higher than yesterday and 2.2% higher from last week, while the number of traders net-short is 0.8% lower than yesterday and 5.9% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse lower despite the fact traders remain net-short. (Emphasis mine)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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