US Dollar Technical Forecast: Neutral

  • The US Dollar (via DXY Index) broke its 2021 high and hit its highest level since July 2020 after the Federal Reserve’s January meeting.
  • American dollars long fillet positioning rose again, remaining near its sharpest level since October 2019.
  • the IG Customer Opinion Index ssuggests that the US dollar has mostly bullish bias against its three main counterparts.

US Dollar Rates Week in Review

The last full week of January for the US Dollar proved fruitful. The greenback rallied against all of its major peers, with the broader DXY index adding +1.65% on the week, the best weekly performance since the second week of June 2021. Among the constituents of the DXY index, USD/SEK and USD/CHF rates produced the largest moves, adding +2.47% and +2.09% respectively. The three main constituents of the DXY index also performed strongly: EUR/USD fell -1.73%; USD/JPY gained +1.35%; and GBP/USD lost -1.23%. After hitting its 2021 high, the DXY index is in bullish breakout territory with signs that momentum continues to build.

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DXY INDEX PRICE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 1)

US Dollar Weekly Technical Forecast: Breakout Acceleration

Two weeks ago it was noted that “support has finally been found in a familiar area around 94.65/74, where the March 2020 low, September 2020 high and September to early November 2021 highs were dug. The rebound from this critical support region saw the DXY index resume the uptrend of June, September and October 2021, suggesting that a false bearish breakout has occurred. Gains above 96.00 are expected over the next few days as a confirmation signal that the greenback’s sell-off is complete. Since then, the DXY Index has hit its highest level since July 2020, gaining ground in seven of the last 10 trading sessions.

The bullish momentum continues to accelerate. The DXY index is above its daily envelope of 5, 8, 13 and 21-EMA, which is in bullish sequential order. The daily MACD is trending higher on its signal line, while the daily Slow Stochastic is in overbought territory. Opportunities to buy dips are considered until the momentum profile returns.

TECHNICAL ANALYSIS OF THE EUR/USD RATE: DAILY CHART (January 2021 to January 2022) (CHART 2)

US Dollar Weekly Technical Forecast: Breakout Acceleration

Similarly, in the mid-January weekly technical forecast, it was observed that “Friday’s Daily Candlestick [January 14] took the form of a bearish outer engulfing bar, and entering after a breakout means that itit is also a bearish key reversal. A return below 1.1380 would provide a strong confirmation signal that the EUR/USD upside breakout has failed.“EUR/USD rates have since broken their 2021 lows and set a new monthly and yearly low for 2022.

The momentum is firmly bearish, with EUR/USD rates below their daily envelope EMA, which is in bearish sequential order. Mirroring the DXY Index, the pair’s Daily MACD and Daily Slow Stochastic have crossed below their signal line and into oversold territory, respectively. Selling rallies is the current modus operandi. Ultimately, a move to 1.1000 is expected in the coming weeks.

IG Client Sentiment Index: EUR/USD rate forecast (January 28, 2022) (chart 3)

US Dollar Weekly Technical Forecast: Breakout Acceleration

EUR/USD: Retail trader data shows that 69.57% of traders are net long with a ratio of long to short traders of 2.29 to 1. The number of net long traders is 2.15% lower than that of yesterday and 21.02% higher than last week, while the number of net-short traders is 3.99% lower than yesterday and 25.90% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that EUR/USD prices may continue to decline.

Traders are sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a stronger contrarian EUR/USD-bearish trading bias.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 4)

US Dollar Weekly Technical Forecast: Breakout Acceleration

GBP/USD rates lost ground fairly quickly, although the technical setup is not as bearish as EUR/USD. Nonetheless, the pair finds itself below its daily EMA envelope, which is also in bearish sequential order. While the daily Slow Stochastic is in oversold territory, the daily MACD has yet to cross its signal line into bearish territory. A deeper setback is still possible; losses towards 1.3170 are possible in the coming weeks.

IG Customer Confidence Index: GBP/USD Rate Forecast (January 28, 2022) (Chart 5)

US Dollar Weekly Technical Forecast: Breakout Acceleration

GBP/USD: Retail trader data shows 58.15% of traders are net long with a ratio of long to short traders of 1.39 to 1. The number of net long traders is 1.15% lower than that of yesterday and 9.51% higher than last week, while the number of net-short traders is 1.13% lower than yesterday and 28.97% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net buyers suggests that GBP/USD prices may continue lower.

Positioning is less net-long than yesterday but net-long since last week. The combination of current sentiment and recent changes gives us another GBP/USD mixed trading bias.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 6)

US Dollar Weekly Technical Forecast: Breakout Acceleration

USD/JPY rates climbed again, continuing their sideways movement that began in October. The back and forth between US Treasury yields and US equity markets is primarily responsible for this turnover, a dance that is unlikely to end anytime soon. As such, a bounce above 116.00 can be seen as an opportunity to sell into range/channel resistance, while dips below 113.50 can be seen as an opportunity to buy support. close to range/channel.

IG Customer Confidence Index: USD/JPY Rate Forecast (January 28, 2022) (Chart 7)

US Dollar Weekly Technical Forecast: Breakout Acceleration

USD/JPY: Retail trader data shows 33.49% of traders are net long with a ratio of short to long traders of 1.99 to 1. The number of net long traders is 8.41% lower than yesterday and 31.56% lower than last week, while the number of net-short traders is 1.02% lower than yesterday and 17.65% higher than last week. last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net short suggests that USD/JPY prices may continue to rise.

Traders are even sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a stronger USD/JPY bullish contrarian trading bias.

Positioning of CFTC COT futures contracts on the US dollar (January 2020 to January 2022) (Chart 8)

US Dollar Weekly Technical Forecast: Breakout Acceleration

Finally, a look at positioning, according to the CFTC’s COT for the week ended January 25, speculators slightly increased their net long positions on the US dollar to 36,830 cthe contracts of 36,402 contracts. The US Dollar’s net long positioning remains near its highest level since October 2019, when the DXY index traded above 98.00. Positioning remains overcrowded, even as the DXY Index hit its highest level since July 2020.

— Written by Christopher Vecchio, CFA, Senior Strategist

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