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Dollar Technical Analysis: The Week That Could Have Been For Bulls
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Friday’s job reports may have delighted those watching the headline numbers for US economic growth prospects, but the details were not as cheery. The Bureau of Labor Statistic in the U.S. showed there was little compelling evidence of wage pressure, which is a kick-off point of inflation measures that could kick the Fed toward their anticipated three hikes per year over the next three years.
I’ve long warned, alongside colleagues that traders should be keeping an eye on Treasury yields, specifically the front end of the curve like the 2y-5y USTs. These Treasuries help show how the market is pricing in/anticipating an aggressive Fed as a belief of higher interest rates at the hands of the Fed would lead to a sell-off in current, relatively low-coupon paying bonds, which would push yields higher. Conversely, a disappointing or increasingly uncertain economic environment that is perceived as not conducive to rate hikes would like to less anticipation of rate hikes and favorable economic environment of growth/ inflation, which would push Treasury Yields lower.
The chart below shows the overlap between the 5-year yield and the DXY. The 5-year has specifically caught the attention of both hedge funds and major non-speculative financial institutions that have conflicting views on the direction of yields. Per the late January CoT report, Hedge Funds are heavily positioned for a Treasury rate price sell-off and yield uptrend whereas non-speculative financial institutions are anticipating tepid growth that would align with falling yields.
Technical Picture:
In December, we stated that the DXY over-extension was the biggest hurdle. Surprisingly, that article marked the high price for the following six weeks to today. Now, we’re nearly looking at the mirror opposite of the mid-December price action. It is fair to ask whether or not the USD has fallen too far, and as you can see below, we’re sitting and not making a lot of further ground at major trend indicator support.
There are multiple reasons for the lack of USD strength. But those reasons are fundamental and the technical focus I would direct you to would be the stalling of momentum at chart support. A failure for momentum to regain downside traction would alert me that at best for the Bears, a retracement was coming, and at worst for the Bears, a major turnaround could be around the corner.
Ichimoku + Andrew’s Pitchfork shows us sitting at an inflection point, where a move that could influence directional bias is likely. I would also follow momentum via RSI(5) on the Daily Chart or the lagging line of Ichimoku Cloud. If the Lagging Line (Bright Green on the chart) breaks below the cloud alongside price, it could show that more downside is possible. However, if we remain above 99 (highlighted rectangle), and momentum rebounds higher, I would not want to hold a short trade with my enemy’s money.
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Chart created by Tyler Yell, CMT
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Shorter-Term DXY Technical Levels for Friday, February 3, 2017
For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours of trading.
T.Y.
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
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You can follow Paul on Twitter at@PaulRobinonFX.
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EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower 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. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD 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 GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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