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True Dollar and Dow Reversals or Simply a Necessary Breather?

True Dollar and Dow Reversals or Simply a Necessary Breather?

Talking Points:

  • The Dollar put in for one of its strongest sessions in weeks - though motivation seems more rebalance than event driven
  • EUR/USD's bounce comes at the upper bounds of a major range but for AUD/USD and USD/CAD it attempts open water reversal
  • A slip from risk trends and overdue rise in VIX above 10 should not draw more anticipation than the subtle moves warrant

How are retail FX traders positioning in EUR/USD, AUD/USD, USD/CAD and other majors as these pairs look on the verge of major breakouts or trend development? See the IG positioning data on the DailyFX Sentiment page

The Dollar put in for a strong rebound this past session, but the impression this move leaves us with after the sound beating it has taken throughout 2017 is understandably reserved. The Greenback's bounce may come with technical precedence from pairs like EUR/USD and GBP/USD, but it noticeably lacked for tangible fundamental motivation. While there were economic listings on the US docket Thursday, they weren't of the brand that have motivated speculators to shift their exposure in the Dollar these past weeks. If the rebound the USD muscled through this past session was merely relief from the constant barrage, it in turn tempers expectations for natural follow through. It is this 'bounce' versus 'bottom' distinction we must think through when we look through some of the more remarkable technical patterns showing up across the majors.

One of the most technically-enticing pairings is the EUR/USD. This benchmark pair posted its highest daily close in two-and-a-half years Wednesday, but still fell within the upper bounds of the range that it had carved out over that same period. Stretching almost to 1.1800, the pair reversed course Thursday and inspired more than a few traders to call a top. I took a poll in Twitter to see what traders expected from this pair's next move to be. The 'bullish breakout' and 'bearish reversal' groups were very similar in size, but those saying they wouldn't touch it until it offered greater clarity on its intentions led the pack. That's wise. The speculative reach in calling a Dollar bottom with EUR/USD is considerable, but nowhere would it be more extreme than with USD/CAD. That pairs has been in virtual free fall for more than two months. While it may have trendline support to trace back a few years, traders shouldn't give too much weight to these lines in the sand. The rebound from the battered Dollar is in its extreme infancy and has overtaken few meaningful technical milestones or found much in the way of convincing fundamental fuel. Traders would be wise to remain skeptical and trade conservatively.

The same caution is warranted for the broader 'risk' trends. Sentiment-oriented markets took a notable tumble intraday through the New York trading hours Thursday. The S&P 500 scrambled back from its session low, but still closed in the red - taking the EEM emerging market ETF, HYG high yield fixed income ETF and even Yen crosses with it. The VIX in turn closed above the 10 threshold for the first time in 11 trading days. As with the Dollar, there was nothing in particular that motivated such a sentiment move. Earnings did generate considerable headlines between Twitter's dive and Facebook's gap up to start the day, but that didn't seem to be the source of the broad sentiment given the rise for the Dow. Afterhours, however, Amazon's substantial miss posed an additional burden to a particularly sensitive area of the market: the tech sector. The collective known as the FAANG (Facebook, Amazon, Apple, Netflix and Google) represents some of the largest companies with among the best performances in the US stock market as of late. Should its members struggle, it could pull back on the technology sector that in turn erodes confidence in US equities as a leading asset class in the mature risk move. Traders should keep very close tabs on risk trends with a mind to the fading liquidity into the weekend. We look at the implications and opportunities with the bounce in the Dollar and slip in risk trends moving forward in today’s Trading Video.

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