US Dollar Index (DXY) Talking Points:
There is a popular adage that markets will do what they need to do to disappoint the most people at any one time. The recent USD outperformance has helped that adage ring true and most notably against commodity currencies like the Canadian Dollar and Australian Dollar as well as the EUR.
EUR/USD At 57.6% of DXY Weight Sets Up For Key Move
Traders are unsure what’s next for EUR/USD. The Bullish view is that the recent 275 pip pullback is nothing but a bump on a Bullish Journey to 1.2630, and potentially 1.2931. Such a move would align with an aggressive breakdown in DXY that would test and break the recently tried and held the support of 88.28 and 87.94.
However, the reversal view on EURUSD that is prudent to consider would be a breakdown of the February low at 1.2205 that could bring a test of 1.2033, the 23.6% retracement of the January ’17 to February range that traveled from 1.0340 to 1.2556. The 1.2000 level also aligns with the 100-DMA.
An inability for this 1.2000 level to hold would open up the view of a broader breakdown on relatively significant USD-strength that could bring a test of the 38.2% retracement of the same range at 1.1708.
A Crowded Trade Gets an Unwelcome Test
Institutions are known as smart money, but they often get caught crowded into popular trades that are quick to reverse. One of those is the play of selling the US Dollar. Per Bank of America Merrill Lynch, the short US Dollar trade is the second most crowded trade second to bullish US equities and the most crowded FX trade.
The short-term outlook has seen focus turned to the concerns of the US fiscal expansion late into an economic cycle and the view that other major central banks normalization anticipation will drive up their currencies, and keep global capital flows as limiting USD upside.
Leave A Comment