Technical Forecast for the US Dollar: Neutral
- The DXY Index failed to retake key technical levels during its September rally, and its performance thus far in October is proving concerning with longer-term bearish implications.
- News that the Trump administration and Congressional Democrats may reach a deal for a fiscal stimulus package is helping spur a drop in US real yields once again, dragging the US Dollar lower.
- The IG Client Sentiment Index suggests that EUR/USD and GBP/USD rates could rally.
US Dollar Losing the Plot
The US Dollar (via the DXY Index) ended the first full week of October on a weak note, closing at its lowest level in nearly a month thanks to a sharp drop on Friday. Synchronous shifts in both technical and fundamental moorings now suggest that the US Dollar may be starting its next leg lower: the pullback in US real yields around US political headlines; and the break of the DXY Index’s uptrend from the September swing lows, all the while failing to climb back above a near-decade long rising trendline. The rest of October is shaping up to be an ugly month for the US Dollar, from this strategist’s perspective.
DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (NOVEMBER 2016 to OCTOBER 2020) (CHART 1)
We start with a look at the weekly chart, as it’s evident that there are several sustained technical breakdowns afoot as the calendar moves towards the ides of October. The most concerning development that has transpired is the breakdown through, and failure to climb back above, the rising trendline from the April 2011 and February 2018 lows.
Technical momentum remains bearish on the weekly timeframe, with the DXY Index trading below the weekly 4-, 13-, and 26-EMA envelope, which is in bearish sequential order. Weekly MACD is trending lower again in bearish territory, while Slow Stochastics are turning lower towards oversold territory. A return back to the yearly lows, near the range around the 23.6% Fibonacci retracement of the 2017 high/2018 low as well as the 38.2% Fibonacci retracement of the 2011 low/2017 high, should not be ruled out over the coming weeks.
DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (OCTOBER 2019 to OCTOBER 2020) (CHART 2)
Bullish momentum began to wane in late-September, and the break below the rising trendline from the September swing lows suggests that the rally witnessed at the start of autumn was a short covering rally (validated by the shifts in futures positioning, as discussed later in this note). Concurrently, as the DXY Index was losing the rising trendline from the 2011 and 2018 lows, the DXY Index failure occurred at the 38.2% Fibonacci retracement of the 2017 high/2018 low range near 94.20. The 94.00/20 area has been a dynamic band of support/resistance since late-July (further reinforcing the severity of the recent breakdown).
The DXY Index is now below its daily 5-, 8-, 13-, and 21-EMA envelope, which is quickly aligning in bearish sequential order. Daily MACD is starting to drop in bearish territory, while Slow Stochastics is quickly sliding towards oversold territory. Gains through 94.00/20 would signify a potential bullish reversal. Otherwise, the US Dollar will remain on exceptionally weak footing.
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CFTC COT US Dollar Futures Positioning (October 2019 to October 2020) (Chart 3)
Looking at positioning, according to the CFTC’s COT for the week ended October 6, speculators decreased their net-short US Dollar positions to 3K contracts, down from the 5.6K net-short contracts held in the week prior. Net-short US Dollar positioning is at its lowest level since early-June. The latest downdraft in DXY Index prices against the thinly-held net-short US Dollar positioning suggests that there is plenty of room for more speculators to come into the market to drive down prices.
IG Client Sentiment Index: EUR/USD Rate Forecast (October 9, 2020) (Chart 4)
EUR/USD: Retail trader data shows 30.80% of traders are net-long with the ratio of traders short to long at 2.25 to 1. The number of traders net-long is 19.09% lower than yesterday and 15.87% lower from last week, while the number of traders net-short is 1.21% lower than yesterday and 6.07% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD 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 EUR/USD-bullish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist