Technical Forecast for the US Dollar: Neutral
- The US Dollar (by way of the DXY Index) was on its solution to its worst weekly efficiency since May 2021 earlier than a late-week rally provided aid.
- US Dollar net-long positioning fell for the primary time in a month, however stays close to its most net-long stage since October 2019.
- The IG Client Sentiment Index suggests that the US Dollar has principally blended bias towards its three main counterparts.
US Dollar Rates Week in Review
The US Dollar’s second week of 2022 was fairly dismal. The dollar misplaced floor towards all of its main counterparts, with the broader DXY Index falling by -0.60% on the week. USD/JPY charges produced the most important transfer, falling by -1.16%. The first and third largest elements of the DXY Index, EUR/USD and GBP/USD charges, gained +0.48% and +0.63%, respectively. But there was a notable shift in worth motion by Friday, and a pointy US Dollar rebound collected sufficient technical proof to counsel that the worst could also be over. It very nicely often is the case that the month-to-month lows for the US Dollar are actually within the rearview mirror.
For full US financial knowledge forecasts, view the DailyFX financial calendar.
DXY INDEX PRICE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to January 2022) (CHART 1)
The DXY Index dropped to its lowest stage since early-November 2021, and alongside the way in which, it appeared that vital technical harm had been levied. The sell-off by the DXY Index noticed worth motion break by means of the uptrend from the June, September, and October 2021 swing lows, however help was in the end discovered at a well-recognized space round 94.65/74, the place the March 2020 low, September 2020 excessive, and September to early-November 2021 highs had been carved out. The rebound from this essential help area noticed the DXY Index retake the June, September, and October 2021 uptrend, suggesting a false bearish breakout transpired. Gains above 96.00 are eyed over the approaching days as a affirmation sign that the dollar sell-off has completed.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 2)
EUR/USD charges broke out greater from their two month-long triangle early final week, however didn’t advance meaningfully earlier than resistance was met in various kinds: the descending trendline from the May and September 2021 swing highs; the 50% Fibonacci retracement of the 2017 low/2018 excessive vary; and the 50% Fibonacci retracement of the 2020 low/2021 excessive vary. But maybe most notably, the each day candlestick on Friday has taken the form of a bearish outdoors engulfing bar, and coming in after a breakout, means it’s additionally a bearish key reversal. A transfer again beneath 1.1380 would provide a robust affirmation sign that EUR/USD’s bullish breakout as failed.
IG Client Sentiment Index: EUR/USD Rate Forecast (January 14, 2022) (Chart 3)
EUR/USD: Retail dealer knowledge reveals 52.36% of merchants are net-long with the ratio of merchants lengthy to brief at 1.10 to 1. The variety of merchants net-long is 1.70% decrease than yesterday and 6.35% decrease from final week, whereas the variety of merchants net-short is 13.85% decrease than yesterday and 4.95% decrease from final week.
We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests EUR/USD costs could proceed to fall.
Positioning is extra net-long than yesterday however much less net-long from final week. The mixture of present sentiment and up to date modifications offers us an additional blended EUR/USD buying and selling bias.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 4)
GBP/USD charges have rallied extra over the previous three weeks than different USD-pairs, a testomony to Sterling energy afforded by rising Bank of England price hike expectations. Nevertheless, the 2 each day candlesticks to shut out the week – a capturing star on Thursday adopted by a bearish piercing candle on Friday – trace {that a} near-term high has been reached. But with the pair firmly above its each day 5-, 8-, 13-, and 21-EMA envelope, in addition to each day MACD nonetheless trending greater above its sign line and each day Slow Stochastics holding in overbought territory, GBP/USD charges provide the least interesting setup to reap the benefits of a possible US Dollar rebound within the days forward. On the opposite hand, if US Dollar weak point resumes, look to GBP/USD charges as a frontrunner to the upside.
IG Client Sentiment Index: GBP/USD Rate Forecast (January 14, 2022) (Chart 5)
GBP/USD: Retail dealer knowledge reveals 38.82% of merchants are net-long with the ratio of merchants brief to lengthy at 1.58 to 1. The variety of merchants net-long is 6.20% decrease than yesterday and 16.73% decrease from final week, whereas the variety of merchants net-short is 9.17% decrease than yesterday and 20.31% greater from final week.
We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests GBP/USD costs could proceed to rise.
Positioning is much less net-short than yesterday however extra net-short from final week. The mixture of present sentiment and up to date modifications offers us an additional blended GBP/USD buying and selling bias.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 6)
Weakness in US fairness markets coupled with a dip in long-end US Treasury yields supplied a near-perfect atmosphere for USD/JPY charges to pullback final week – and that they did. In doing so, the uptrend from the September and December 2021 swing lows was damaged, suggesting that the multi-month rally has completed. However, with the each day candlestick on Friday forming right into a hammer, worth motion could also be hinting {that a} interval of uneven, sideways motion is forward for the pair. USD/JPY charges will not be an interesting lengthy but, however there’s early proof that the worst of the promoting could also be completed within the near-term.
IG Client Sentiment Index: USD/JPY Rate Forecast (January 14, 2022) (Chart 7)
USD/JPY: Retail dealer knowledge reveals 43.10% of merchants are net-long with the ratio of merchants brief to lengthy at 1.32 to 1. The variety of merchants net-long is 8.45% greater than yesterday and 25.89% greater from final week, whereas the variety of merchants net-short is 17.43% decrease than yesterday and 34.70% decrease from final week.
We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests USD/JPY costs could proceed to rise.
Yet merchants are much less net-short than yesterday and in contrast with final week. Recent modifications in sentiment warn that the present USD/JPY worth development could quickly reverse decrease regardless of the very fact merchants stay net-short.
CFTC COT US Dollar Futures Positioning (January 2020 to January 2022) (Chart 8)
Finally, taking a look at positioning, based on the CFTC’s COT for the week ended January 11, speculators decreased their net-long US Dollar positions to 37,860 contracts from 39,057 contracts. Despite the decline, net-long US Dollar positioning stays close to its highest stage since October 2019, when the DXY Index was buying and selling above 98.00. Further proof of net-longs being liquidated might in the end show fruitful for the US Dollar on a longer-term foundation as overcrowding has hindered extra energy.
— Written by Christopher Vecchio, CFA, Senior Strategist
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