Talking Points:

• DXY Technical Strategy: DXY remains in “sell the rips” mode below 94.08
• DXY appears to be bouncing off an extreme downside target, may be subject to month-end flows
• Fed Funds Future bets take the probability of a Fed hike in 2017 down to 1/3
• IG Client Sentiment Highlight: EUR/USD (57.6% of DXY) sentiment favors further push higher

The Dollar Index has pushed off the lows for 2017 that wastraded at earlier in the month at 91.01. The technical level of focus that traders should keep in their sights is the March 2009 high of 89.62. The 89.62 level markets the March 2009 high (seen on the weekly chart below. A break below this level would open up the breakdown/ overlap of prior price patterns.

From a price structure view, an overlap tends to indicate lack of long-term upside. A hold of support at 89.62 would favor the view that we could still be within a multi-year DXY bull market. A break below 89.62 would make the argument that we are within a larger downtrend for the US Dollar Index.

Weekly DXY Chart: Break below March 2009 High Would Eliminate LT DXY Bull View

Chart by Tyler Yell, CMT

The chart above shows the US Dollar Index from the 2008 low up to the January 2017 high. 2017 has seen a ~12% drop in the Dollar Index, but traders have not known whether or not the price drop has been a sharp correction within a broader Bull market that would be expected to continue higher or whether we are in the midst of a multi-year move lower in the USD. I continue to favor the latter view.

We can look to different components of the chart to help guide us from here. First, until the bearish channel of 2017 (falling red channel) on the chart above and below fails to hold a price breakout, the bias will be for further US Dollar index weakness. The overall bias for swing trading is to sell strength or on a breakdown below a lower high. There has been a consolidation higher, but momentum favors further weakness until material strength is seen as evidence of a channel breakout while holding the March 2009 high as support.

Daily DXY Chart: Dollar Index Momentum favors Bearish Continuation

Chart by Tyler Yell, CMT

The daily chart above puts focus on internal pivots to help guide your bias and trading. Initial resistance can be found at 92.68/74. Though price recently broke through focal support, there are not enough signs that a base is in place. On Wednesday, the Federal Reserve will announce their rate decision, which is widely expected to remain at the current 1% level. The focus of the FOMC decision is whether or not the famous DOT plot, where Federal Reserve voters anonymously place a vote for where they see the reference rate through 2020, is lowered.

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From a sentiment perspective, we are seeing a stretched DXY short position. However, an aggressive short position is not enough to trigger a buy signal. IG Client Sentiment helps us to see retail sentiment best through EUR/USD, which is 57.6% of DXY. Other position indicators like the Daily Sentiment Index (DSI) show the bearish positioning of DXY near extreme levels at 17% Bulls as of Monday’s close. That means there is a short-covering risk if the FOMC result is a hawkish surprise that would send DXY higher. However, the trend is there for a reason, and if nothing surprises positively for the US Economy, the upside will likely come from ECB rhetoric talking down their currency giving the USD a boost, but likely, not a definitive trend change.

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IG Client Sentiment Highlight: EUR (57.6% of DXY) sentiment favors further upside in EUR/USD

EURUSD: Retail trader data shows 33.0% of traders are net-long with the ratio of traders short to long at 2.03 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.08475; theprice has moved 10.5% higher since then. The number of traders net-long is 7.4% higher than yesterday and 3.2% lower from last week, while the number of traders net-short is 10.8% higher than yesterday and 1.6% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD 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 EURUSD-bullish contrarian trading bias (emphasis mine).

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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com

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