Technical Forecast for the US Dollar: Bearish
- The DXY Index’s rebound in recent weeks has done little to revert the major technical damage sustained in recent months, remaining below the rising trendline from the April 2011 and February 2018 lows.
- Net-short US Dollar futures positioning remains near its highest level since March 2011, helping feed the nascent narrative that a short covering rally may soon emerge.
- The Finance Prop Client Sentiment Index suggests that EUR/USD and GBP/USD rates will gain in the days ahead.
US Dollar Rates Week in Review
The US Dollar (via the DXY Index) posted its second weekly loss of the year, and in the process fell back to the descending trendline from the March and November 2020 highs – the pandemic downtrend. Perhaps more importantly, the DXY Index’s rebound in recent weeks has done little to revert the major technical damage sustained in recent months, remaining below the rising trendline from the April 2011 and February 2018 lows.
Without any bonafide bullish catalysts on the horizon, and two of the components representing 69.5% of the DXY Index, the British Pound and the Euro, appearing poised for further gains, the US Dollar may once again be on its backfoot.
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Forex Economic Calendar Week Ahead
The third week of February offers a mixed economic calendar, with a more global focus (and less so on the United States, politically or economically, with a federal holiday on Monday, shuttering markets). To wit, there are only three items on the calendar that are worth paying attention to from the US Dollar’s perspective.
On Wednesday, the January US retail sales report will offer insight into consumption trends for the world’s largest economy, which is incidentally the largest component of GDP. Also on Wednesday, the January FOMC meeting minutes will be released, which may underscore the Fed’s commitment to its low interest rate regime. Lastly, on Friday, the February US Markit Manufacturing PMI flash is due.
For full US economic data forecasts, view the Finance Prop economic calendar.
DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (February 2020 to February 2021) (CHART 1)
The DXY Index is barely above the downtrend from the March and November 2020 highs, and the candle on Friday, February 12 warns of more downside. The daily shooting star whose resistance was found at the underside of the uptrend from the intrayearly swing lows suggests that price action is turning more bearish.
Evidence of bearish momentum gathering are starting to accumulate. The DXY Index is now below its daily EMA envelope, which is in bearish sequential order. Daily Slow Stochastics are racing towards oversold territory, while daily MACD is descending towards its signal line. The next swing lower by the DXY Index may be imminent.
DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (February 2011 to February 2021) (CHART 2)
The longer-term view established in the latter half of December 2020 remains valid: “we thus view the latest development with hesitation, particularly when viewed in context of the longer-term technical damage wrought in recent months; the DXY Index remains below its multi-year uptrend, and could be working on a multi-year double top. So long as the rebound remains below 91.75, the DXY Index outlook remains bearish on a longer-term basis.”
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CFTC COT US Dollar Futures Positioning (February 2020 to February 2021) (Chart 3)
Next, looking at positioning, according to the CFTC’s COT for the week ended February 9, speculators slightly increased their net-short US Dollar positions to 14,830 contracts, up from 14,830 contracts held in the week prior. Net-short US Dollar positioning is near its highest levels since March 2011, when speculators held 15,494 net-short contracts. Overall, positioning has been relatively steady since the third week of December, when speculators held 14,056 net-short contracts.
Finance Prop Client Sentiment Index: EUR/USD Rate Forecast (February 14, 2021) (Chart 4)
EUR/USD: Retail trader data shows 36.25% of traders are net-long with the ratio of traders short to long at 1.76 to 1. The number of traders net-long is 17.83% lower than yesterday and 16.43% lower from last week, while the number of traders net-short is 3.39% lower than yesterday and 14.97% 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.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist