US Dollar Technical Analysis Forecast Shows Comfort – Perhaps Volatility

US Dollar Technical Forecast Talking Points:

  • The DXY Dollar Index corrected at the floor of a large rising channel dating back 18 months
  • While an impressive move, this ‘path of least resistance’ that suits pairs like EURUSD, AUDUSD
  • With some near-term resistance, can DXY and USDJPY continue high or is active lift to stall?

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Technical Forecast for US Dollar: Bullish

Not all market reversals are systemic changes in direction with tempo and not all breaks come backed with meaningful follow through. I repeat that to myself as a mantra, more often when I find myself eager for more active markets. While we have seen some turns and provocative technical milestones (like the Dow and S&P 500 records) recently, the market is still struggling for unrestrained momentum. The backdrop for the Dollar is no different. The benchmark currency managed an impressive bullish turn and short-term momentum this past week, but how far should we project this charge? Rather than looking at the pace alone, consider the point of the correction. A channel floor stretching back 18 months served as the spring board of the bearish to bullish transition. That was a ‘path of least resistance’ move. Instead of mustering the strength to force a break and much more substantial, long-term reversal the market reverted to the more well-trekked path.

Trading for congestion or ranges in a broader financial system that supports such developments simply follows the probabilities. That said, when following a lower boundary path, there may be less drive behind the move. While the barriers we are likely to face in congestion versus a serious breakout are less significant, there may not be enough speculative appetite to clear the lower hurdles. At the midpoint of the Dollar Index’s channel to start the new trading week, it may be difficult to muster enthusiasm on the open as we don’t have any overt, short-term discount or premium. Trading around 98.50 though could generate the next foothold.

Chart of DXY Dollar Index with 50-Day Moving Average (Daily)

Chart created with the TradingView Charting Platform

To assess whether we are dealing with significant momentum to carry or fade over the weekend, we can assess the run that we’ve had through Friday’s close. In the swing from channel border to its midline, we ran a five consecutive day climb which not that unusual through 2019. The pace set with this upswing leaves us with the highest 5-day rate of change since August 30th and the third fastest run over a similar period in a year. Both of those previous examples ended in reversal but they were also at the top of the aforementioned channel, which is not the case now.

Chart of DXY Dollar Index with Consecutive Candle Count and 5-Day ROC (Daily)

US Dollar Technical Analysis Forecast Shows Comfort - Perhaps Volatility - In Range

Chart created with the TradingView Charting Platform

Lowering the time frame to look at the immediate boundaries to consider for a week’s time frame, the extreme barriers are 99.70 which is the October swing high (also a more than two-year peak) and 97.15 which is a range bottom that coincides with the rising channel floor at this point. More immediate for resistance on the open next week is the 50-day moving average which we were pressuring to end Friday and the 50% Fib (technical note: there is no 50 Fib in the sequence) at 98.40. Above that 98.70 has tripped both bulls and bears up at different points these past two months. Lower, a longer-term Fib and some chop in recent price action seems to give weight to 97.85. The 38.2% Fib of the past month’s range at 98.10 can also mount some minor restraint.

Chart of DXY Dollar Index with 50-Day Moving Average (8-Hour)

DXY Dollar Index with 50-Day Moving Average

Chart created with the TradingView Charting Platform

Among the ‘major’ crosses, most would turn to EURUSD to express a view on the Dollar. However, this is a mirror of the DXY and therefore falls at the middle of the established range which doesn’t offer much in the way of potential momentum. Instead, I would out the likes of USDJPY. Yet, here, the Dollar’s climb has been stunted and we find ourselves in an awkward position whereby a range break is simply dribbling over the 109 level. Normally, a productive break has tangible follow through after the signal. Without the momentum, the risk of a false break reversal is far heavier.

Chart of USDJPY (Daily)

USDJPY Daily Price Chart

Chart created with the IG Trading Platform

A Dollar-based pair that better conforms to our general market condition would be GBPUSD (the ‘Cable’). Here, we are facing a short-term break lower below 1.2800. That is an enticing development for those looking for more volatility out of this market. Between this and a break above 1.3000, the slide we saw through Friday is the path of least resistance. However, it is still an effort at accelerating a break into a meaningful trend. That will be difficult to achieve, particularly with the Sterling habitually throwing the breaks amid Brexit uncertainty.

Chart of GBPUSD with 50-Day Moving Average (Daily)

GBPUSD with 50-Day Moving Average

Chart created with the IG Trading Platform

If I were to align technical patterns to underlying market conditions, the most appealing of the Dollar pairs would likely be AUDUSD. The consolidation below 0.6950 at an 18-month trendline resistance and 200-day moving average showed a deference for the level which finally showed some traction on a retreat this past session. The rising channel of the past five weeks started to give through Friday, so watch to see if we move back towards 0.6810 and ultimately 0.6675 next week.

Chart of AUDUSD with 200-Day Moving Average (Daily)

AUDUSD with 200-Day Moving Average Daily

Chart created with the IG Trading Platform

See how retail traders are positioned in Crude Oil along with other key FX pairs, indices and oil on the DailyFX Sentiment page.

For speculative positioning behind the Greenback, large speculative futures traders were confident that this past test of the year-and-a-half and remarkably measured channel would break. Net exposure through Tuesday showed long interest tumbled even further to almost a neutral level. Given the time frame for updates, a lot of that short-term interest may be reversed in next week’s reading. On the shorter time frame, retail traders are showing they are more than aware of the congestion that EURUSD has established these past months. The crowd has already shifted back net long as they show limited interest in pushing all the way to the pair’s lows.

Chart of Net Speculative Positioning in US Dollar Futures from CFTC Report (Weekly)

US Dollar Futures From CFTC Report

Chart of Retail Trader Positioning from IG Clients (Daily)

Retail Trader Positioning from IG Clients Daily

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