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Is the Dollar Attempting a Full Reversal or Another Limited Correction?

Is the Dollar Attempting a Full Reversal or Another Limited Correction?

Talking Points:

  • The DXY Dollar Index marked notable progress this past session with a break of a 50 DMA and three-week consolidation
  • There is a great deal of ambiguity between a false correction and true reversal, but the qualifier is conviction
  • While there is far more technical and fundamental progress to make, I'm already impressed by EURUSD and GBPUSD

With the Dollar generating speculative interest in the debate between reversal and correction, how are retail speculators positioning behind the majors? See current position on the DailyFX Sentiment page.

There is no definitive signal that can be relied upon when deciding whether a market is experiencing a mere correction or a full-blown trend reversal. Conviction comes with progress through technical, fundamental and positioning progress. What mix and how much evidence is necessary depends on the trader. Risk tolerance is a personal barometer that can differ wildly depending on the person. For the bold traders that don't want to miss the often-volatile opening stage of a turn in the markets, a minimum of evidence (often technical) is needed before they jump into the market. On the other end of that spectrum, the cautious observer will look for a range of signals across various analytical techniques before entering the market - often after some significant progress towards the new course bearing is already made. Before you evaluate the Dollar's status with this week's thawing, it is important to establish your own tolerance.

Personally, I fall on the more cautious end of the spectrum. However, I am still a speculator; so after hitting a certain minimum degree of confidence, I like to take some exposure and build up in duration, size or breadth according as my conviction builds. With the Dollar we are facing just such a qualification of conviction in trend change with its recent change in tack. The ICE Dollar Index (DXY) has spent the past month consolidating, which is often a sign that a prevailing trend is stalling and is more prone to reversal. More recent technical and fundamental developments however have build a stronger case to that speculative view. This week, the DXY has climbed with Tuesday registering a break of a horizontal resistance, progressive trendline resistance and the 50-day moving average (DMA). And, if we wanted to reduce the influence that EURUSD in particular had in this Greenback measure, we find the USDollar Index and an equally-weighted index of the 7 majors shows the exact same development.

As important as technicals are, I am a firm believer that fundamentals are where much of the true drive is derived. The 2017 tumble from the Greenback has helped to substantially reduce the excess premium that the currency had built up over the years. That is particularly important for its standing as a safe haven given the treatment it had garnered for a time as a carry currency as the only central bank tightening policy. Far less stretched, it can more readily revive its haven status. What's more, bears may have overshot on the monetary policy bearing. Last week, the Fed made a concerted effort to undercut speculation that they would not continue to tighten policy. Fed Chair Yellen followed that up this past session when she voiced her concern about moving too slowly to normalize monetary policy. The Dollar's rebound is so far nascent, but it holds considerable potential should conditions continue to support its recovery. I've taken some exposure on EURUSD and GBPUSD given my level of conviction and with their potential-probability appeal. I discuss the Dollar's slow turn and its potential for becoming something more substantial - or falling apart - in today's Quick Take Video.

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