Technical Forecast for the US Dollar: Neutral
- The DXY Index is lingering below multi-year trendline support (April 2011 and February 2018 lows), but has yet to find any significant follow-through to the downside.
- Technical perspectives may carry greater weight in the week ahead as the forex economic calendar is rather light for the US Dollar, leaving fundamental influences in the background (but for politics, of course).
- The IG Client Sentiment Index suggests that EUR/USD and GBP/USD rates could fall.
US Dollar Keeps Bears at Bay
Despite giving up its early-week gains, the US Dollar (via the DXY Index) swung higher into the middle of November, continuing to keep dollar bears at bay. The DXY Index continues to linger below multi-year trendline support in the form of the April 2011 and February 2018 lows, but has yet to find any significant follow-through to the downside – even after Democrat Joe Biden’s win in the US presidential election and the news around the Pfizer COVID-19 vaccine development.
Such technical resiliency in the face of what should be otherwise bearish catalysts is worth consideration, particularly in the face of overwhelming US Dollar bearish narratives dominating financial punditry.
DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (NOVEMBER 2010 to NOVEMBER 2020) (CHART 1)
It’s been exactly four weeks since our weekly focus was trained on the US Dollar (via the DXY Index), but not much has changed during that time; such is the nature of rangebound markets. The slight rebound seen in the past week failed to produce a rally in the DXY Index above the rising trendline from the April 2011 and February 2018 lows, though the DXY Index is holding just above the downtrend from the March and May swing highs. While the fundamental headwinds have shifted, the technical evidence has not yet mounted for a significant bullish reversal – nor follow-through to the downside.
Over the past several months, the DXY Index’s rally attempts have experienced 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, suggesting that were the DXY Index to overcome this hurdle, there may be greater confidence of a narrative-shattering and short covering rally developing.
DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2019 to NOVEMBER 2020) (CHART 2)
The downtrend from the March and May swing highs has been broken, if only slightly, but that doesn’t mean that there is any less validity to the change in trend. Since late-July, the trend has been predominately sideways, with a clear range carved out between 91.75 and 92.74 (mirroring the move in EUR/USD rates, the largest component of the DXY Index).
True to a rangebound market, the DXY Index is intermingled among its daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is starting to rising just below its signal line, while Slow Stochastics have flatlined below their median line. Until the range breaks, the DXY Index is simply playing pong.
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IG Client Sentiment Index: EUR/USD Rate Forecast (November 13, 2020) (Chart 3)
EUR/USD: Retail trader data shows 33.38% of traders are net-long with the ratio of traders short to long at 2.00 to 1. The number of traders net-long is 13.70% higher than yesterday and 27.37% higher from last week, while the number of traders net-short is 1.25% higher than yesterday and 4.90% lower 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.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist