US Dollar and GOLD Technical Analysis

The barriers are the January-March line and 2016 trendline. A move on either side of these lines (daily close) ideally ushers in the next directional move.” The drop below the line indicates a potentially major trend change. If DXY bounces, then pay attention to the underside of the line (99.50s) for resistance.

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Traders hoping to gain an understanding of the LT direction of the USD would do well to keep an eye on the Trendline connecting higher lows since 2014. Currently, DXY is showing good Trendline support over the longer-term near 98.50. The test of the 3-year Trendline aligns with long-term seasonality studies where DXY has risen in 9 of the past ten years. However, recent momentum in past months have been disappointing DXY bulls, and the EUR is a key reason why DXY fails to gain upside traction.

Much of the EUR downside since 2014, when DXY took off higher on the chart below, has been exasperated by fears of “what’s next?,” for the Euro. However, a look at the options market will show you that over the next two months, the 25-delta risk reversal is trading at its highest levels for the year. In other words, options traders have never worried less about EUR downside relative to the USD this year, which could keep EUR/USD trading higher on average.

Any traders with an upside bias on DXY should continue to watch this Trendline support. Ichimoku currently favors downside momentum continuing and there remains hard resistance at the gap high after the first round of the French Presidential election when EUR/USD gapped over the weekend by its largest margin ever from 1.0750 to ~1.0900.

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From July 2014 to early 2017, the DXY rose ~30% in anticipation of the great divide in monetary policy. However, we now see that economic strength and data surprises are not ‘Made in the USA,' but rather in other economies like the Eurozone, Canada, and China. The lack of US growth could mean that the Fed will no longer be the leading central bank in terms of normalization, but possible honing a mea culpa of normalizing too much too soon.

When looking at the chart, you can see that the Dollar is traveling comfortable in a bearish channel and is working to test an internal Trendline drawn from the 2012 peak and the 2016 low. A break below the internal Trendline on a weekly basis would open up the increasing probability of a move to the 38.2% retracement (labeled long-term support) that aligns with the 2016 low at 92.13. Only a daily close above 95.50 would neutralize the current bearish positioning. However, as the blows to hope keep coming for US inflation (despite base metals rallying), I won’t hold my breath in anticipation that the weak USD finds life.

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2017 is a great year for risk as it seems equity traders see no need for a sell button, but the same can’t be said for the USD. Developed market FX has been having a field day with USD over the session and today’s drop brings the total loss for 2017 for the DXY to 10%. The key technical support many are now watching is the 2016 low near 92. Much of the weakness due to the 57.6% weighting of the EUR in the DXY is the impressive EUR strength. Whatever the reason, the pressure is likely to remain. Per the CFTC, institutional speculators (hedge funds) are holding their largest net short position in the Dollar Index since 2013 before the Taper Tantrum erupted and Bernanke put the pacifier back in the market’s mouth.

One way that many traders were playing USD weakness was via the AUD, which was trading at 2-year highs earlier in the week. On Friday morning, RBA’s Guy Debelle took some enthusiasm out of the trade by saying the revelation in the RBA minutes this week that the neutral rate has shifted higher is not predictive of a future rate increase. On that announcement, AU sovereign bonds went bid falling ~4%, and the AUD was sold across the board. However, looking at the macro picture, risk-on currencies like the commodity bloc and EMFX still appear a favorable way to play USD weakness.

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Initial resistance lines up in the 10473-84 area, marked by the underside of a previously broken falling channel and the 23.6% Fib retracement.

The downward momentum for the US Dollar has wobbled but overall remains on a course that anticipates further weakness. From a fundamental perspective, we heard recently from Federal Reserve Bank of New York President Bill Dudley who said that it would take some time for US inflation to rise to 2%, especially on a year-on-year basis. While he blamed the effect on one-offs from months that will take a while to fall out of the year-on-year readings, there appears to be little reason to anticipate the Fed would turn to a surprisingly hawkish stance that would lift the USD out of its 2017 downtrend.

Last month, the key focus of USD weakness was EUR and commodity currency strength, which took EUR/USD above 1.19 and USD/CAD below 1.25. In August, so far, it appears that the Japanese Yen is the focal currency, which has recently traded toward 109 and is close to the lowest level since mid-June of 109.27. A break below 108.13, YTD low of USD/JPY, would argue that the common denominator of larger moves in FX this year has been a rather weak USD, which show few credible signs of turning.

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After penetrating the zone of resistance that had developed last summer from $1,350-$1,375, short-term bearish price action has begun to show. Even with North Korea conducting another missile test and while the U.S. Dollar remained relatively bearish against most currencies, sellers controlled short-term price action in Gold, driving prices down to a key support zone.

If we take the major move of last year’s high down the December, pre-rate hike low; the 76.4% retracement comes in at $1,315.60 while the 78.6% retracement is at $1,321.15. This creates a zone that’s, at least so far, held the lows during this retracement. We’re looking at this zone in the below chart, demarcated in blue.

The fact that Gold prices haven’t put in a more vigorous response to this support zone combined with the fact that bulls failed to take over after another North Korean missile flew over Japan, it would appear that more weakness is on the horizon for Gold prices. This can lead to a deeper retracement in Gold prices, and below we’re looking at three support zones of interest below the current area. This could be looked at as potential take-off points for the longer-term bullish theme, with the expectation that an eventual re-test of $1,375 will be in the cards; while these levels can also function as short-side targets for those looking to take on bearish exposure to Gold. If Gold prices slip below the $1,275 level, then the confluent zone around $1,250 becomes attractive for short-side profit targets.

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The European Central Bank may have set the table for US Dollar Bulls to enjoy a fine fourth quarter this week.
On Thursday, President Mario Draghi caused a major shift in positioning as evidenced from multiple markets that were pricing in EUR strength over the coming quarters unwinding. The takeaways from Thursday was an assurance from the ECB was that the market should not worry about ECB rate hikes, which was something the market was pricing in before the meeting. Draghi also discouraged the use of the word taper (the wind-down of QE) as the ECB will be looking to provide substantial market support going forward, which caused the EUR to eventually fall below 1.16 and the DXY to break above 95.

This week, the US Dollar has traded to a three month high with sentiment rising and favoring further DXY strength going forward. On the charts, the significant development this week was the close above the confluence of resistance near 94.20. The zone around there combined three different technical focuses. First, the mid-August corrective/lower high was at 94.15 followed by a 161.8% extension at 94.20 of the initial move higher when the DXY was seen as too oversold in early September given possible rate hikes at 91.01 to the September 14 high of 92.65. Lastly, a price channel that has framed price action for most of 2017 also predicted price pressure developing above 94. The close this week that accounted for the highest weekly gain of 2017 likely indicates a shift in behavior toward the DXY?

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The US Dollar Index (DXY) appeared to be on a one-way course as it continued to aggressively fall through most of 2017 and the start of 2018. However, on January 25, after tapping 88.43, we have seen a bounce that has aligned with the global risk-off move.

Now, the DXY is looking to rise for the second straight week,and a few key technical tests await the US Dollar Index at 91, the 38.2% retracement level of the October-January range followed by 92.58, the 61.8% retracement of the same date range.

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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.

A recent FX forum in Miami, TradeTech FX, had bank strategists calling for extensive US Dollar weakness with calls of 1.35-1.43 EUR/USD by year end, which would likely see DXY sub-80 to 78.78, which is the 76.4% retracement of the 2008-20017 range in DXY.

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