Dollar Talking Points:
- The DXY Dollar Index suffered its biggest weekly loss since the week of August the 20th
- Historical range and volatility (ATR) on key pairs like the EURUSD are staging at extremes lows
- See the 1Q 2019 fundamental and technical forecast for the Dollar updated on our trading guides page
Technical Forecast for US Dollar: Bearish
On a strictly statistical basis, the Dollar closed out a particularly painful week. Yet, the context of its broader technical patterns and environment suggests we are not yet in a position to expect the revival of a genuine trend. Extending its impressively precise range reversal from 97.75, the DXY dove back into the middle of its congestion pattern stretching all the way down to support defined by the confluence of the trendline reaching back to May and the 200-day simple moving average now at 95.80. From Friday close to Friday close, the index dropped approximately 0.8 percent for the worst slide since the week of August the 20th. Before that, we don’t have a comparable performance until February of last year – when the currency was searching out the bottom of its 14-month bear trend. This move promises little for the development of a new phase beyond the established range. On the other hand, volatility applied to tightly bound spaces runs a greater and greater risk of prompting a breakout – especially as key events like this coming week’s FOMC rate decision pop up.
Chart of DXY Dollar Index with 200-Day Moving Average (Daily)
For the big picture overview of the Dollar, we can see the extremes in the dwindling space found from the rising triangle reaching back to the early May lows. The rolling 60-day historical range on the index as a percentage of spot price (seen below) is the most restrictive trading we have seen from the currency since the Summer of 2014 – a period synonymous with extreme inactivity. So long as this technical pattern continues to close, the reading will continue to drop towards unprecedented levels. The question to follow this formation is whether a simple break will immediately signal a categorical shift into a ‘breakout’ environment. General market conditions suggest a mere technical development alone – even from a currency of this heft – would not earn a transition. However, if the break happens alongside or is prompted by a groundswell of speculative motivation, we could jump to a trend fairly quickly. And ‘when’ (not ‘if’) that happens, I feel the bearish case has greater weight.
Looking for a fundamental perspective on USD? Check out the Weekly USD Fundamental Forecast.
Chart of DXY Dollar Index and 3-Month Historical Range as Percent of Price (Weekly)
As we keep tabs on the 97.75 to 95.80 range that currently reflects the currency’s principal borders, we must keep very close observation of volatility – both expected and historical. We see both measures of activity below. The red line is the 20-day ATR or average true range. While we are still moving in generally the same range as previous months, the day-to-day activity has constricted. While this can remain the case for an extended period time, there is certainly a contrarian element to the reading as we confer to the higher time frames, the historical reference and how narrow the technical bounds are at present. In terms of expected volatility, I have aggregated the CBOE’s volatility measures derived from EURUSD, USDJPY and GBPUSD – the three most liquid pairs. While this reading has also slid from peaks in November and January, it draws a notable contrast to the ‘actual’ volatility measure.
DXY Dollar Index and Avg of CBOE’s EURUSD, USDJPY, GBPUSD Vol Indexes and ATR (Daily)
Looking to the key, individual currency pairs, the EURUSD draws an even more dramatic picture than the DXY itself – which is ironic as this pair is the primary component of the index. We could look at the daily chart, but we see much the same and don’t see the context of where the market is likely to move when it does eventually clear its immediate hurdles. To the downside we have 1.1200 support as a range floor and confluence of Fibonacci levels. A bearish break has plenty of subsequent, interim levels to question momentum at along the way; but ultimately the 1.0350 swing low from late 2016 is the far target. A resolution to the upside would be far more likely to indulge the start-and-stop progress. I would expect second guessing of commitment to trend every 100 pips or so.
Chart of EURUSD and 20-Week ATR (Weekly)
When reference the stoic rise of the Dollar, USDJPY is one of the pairs where the single currency is making some of the most remarkable progress. The rising trend channel for the key pair since the Flash Crash to start the year has covered 400 pips from rational lows and 700 pips when we incorporate the extreme volatility on January 3rd. As impressive as the channel may be, it is not offering much in the way of slope – average daily advance. There is little doubt that a 112 break would be bullish progress but it wouldn’t ignite a dramatic climb. A break below 111 on the other hand could prompt deeper reflection, but I would still place greater emphasis on EURUSD clearing 1.1500 if I were looking for a Dollar cue.
Chart of USDJPY (Daily)
Meanwhile, GBPUSD has offered some of the most remarkable trading amongst the majors stretching back over the weeks and even months. Yet, what volatility we have seen from Cable is heavily dependent upon the Sterling rather than the Dollar’s own contributions to activity. Brexit headlines have earned more than a few remarkable swings and was clearly the spark for pair’s biggest single-day rally since April 2017 this past Wednesday. It is possible that further updates on this theme next week can spark a breakout and perhaps even a trend, but extrapolating a lasting Dollar run from GBPUSD’s clearance would be a serious stretch.
Chart of GBPUSD with 50-Day Moving Average (Daily)
As for speculative positioning to fuel a meaningful move ahead, the net speculative futures standing from the COT suggests the currency is not stretched to the same extreme as we would draw from the DXY’s test and rejection at 97.75. That said, exposure is still stretched in favor of the bullish view and adding to that position will likely take more significant encouragement whereas a reversal can likely be prompted more readily as traders rush to rebalance. From the retail side, FX traders have flipped negative EURUSD for the first time since early February. The short-term perspective of this crowd is clear, as is their observation of the explicit levels on the exchange rate. Expect this group to continue to play the range and meet serious surprise when there is an eventual break.
Chart of Net Speculative Positioning in Dollar Futures Positions from CFTC Report (Weekly)
Chart of Retail Trader Positioning from IG Clients (Daily)
Other Weekly Technical Forecast:
Brexit Newsflow and Political Manoeuvres
Sterling (GBP) Price Fundamental Forecast:Neutral
Q3 2019 GBP Forecast and Top Trading Opportunities
No UK Data Next Week Will Leave Sterling Vulnerable to Rumor Risk
Sterling has nudged higher over the week, aided principally by slightly better-than-expected wages, jobs and retail sales data. UK inflation also edged higher and in a world without Brexit, these releases would have the Bank of England discussing whether the current monetary policy was appropriate or if it needed to be tightened. However, as has been the case for many, many months, Brexit is still the driver for Sterling and will remain so until October 31.
Next week there is no market moving hard UK data of note, leaving Sterling at risk of Brexit rumors and news flow. The UK market will also be holiday-thinned next week, leaving GBP potentially exposed to outsized moves in limited liquidity markets.
Brexit news flow continues unabated with the latest batch of headlines suggesting that a cross-party alliance of MPs may come together to form a national unity party if UK PM Boris Johnson loses the expected vote of no-confidence likely to be called in early September. The current Labour Party leader has said that he will act as interim PM is this succeeds ahead of an early general election with the Labour Party promising a second referendum. According to reports, four prominent remainer Conservative MPs are involved in talks with Corbyn.
Sterling technical are covered in a different section but the chart below shows a familiar pattern. Since late-April there have been three occasions when moves lower are met with a quick reversal before the overall bearish pattern takes over. Will the current move prove to be the fourth occasion?
GBPUSD Daily Chart (December 2018 – August 16, 2019)
Crude Oil Price Outlook Bearish, Eyeing January Lows on Long Bets
Crude Oil Technical Forecast: Bearish
- Crude oil prices struggled sustaining upside momentum this past week
- Technical signals on the daily, 4-hour chart hinting at weakness ahead
- IG Client Sentiment offering stronger bearish crude oil contrarian bias
Build confidence in your own Crude Oil trading strategy with the help of our free guide!
Crude Oil Technical Outlook
Crude oil prices struggled to sustain upside momentum this past week as US recession fears plagued risk trends and the sentiment-linked commodity. From a technical standpoint, this falls in line with oil’s dominant downtrend since the middle of April when the commodity fell through rising support from the end of last year.
Looking at the oil daily chart, gains during the front-end of the past 5 trading days were tamed by a falling channel of resistance going back to the middle of July (parallel red lines below). Horizontal resistance also held at 57.38, former highs from February. This left crude oil sitting just above the lower boundary of psychological support which is a range between 54.55 and 55.41.
If descending resistance continues to define near-term price action in the commodity, we may see crude oil extend weakness down the road. Prices may eventually end up at the next critical psychological area between 50.41 and 52.08. This range held as support on multiple occasions such as in June and back in January. Meanwhile, near-term technical signals also hint towards downtrend resumption.
Crude Oil Daily Chart
Crude Oil Chart Created in TradingView
Zooming in on the crude oil 4-hour chart below, rising support from August 7 was taken out this past week. As such, a close under 54.55 may pave the way for continued declines. Otherwise, the upside challenge for the commodity is taking out descending resistance from the middle of July which would expose the July 31 high at 58.79 down the road.
For more updates on crude oil, including fundamental developments, feel free to follow me on Twitter here @ddubrovskyFX.
Crude Oil 4-Hour Chart
Crude Oil Chart Created in TradingView
Crude Oil Sentiment Outlook – Bearish
Meanwhile, IG Client Positioning is offering a stronger crude oil bearish contrarian trading bias. Traders are further net long on August 16 than compared to the prior day. To learn more about how you can use this in our own trading strategy, join me every week on Wednesday’s at 00:00 GMT as I uncover what market positioning has to say about the prevailing trends in financial markets.
Crude Oil IG Client Positioning
FX Trading Resources
— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
Into the Jackson Hole Vortex
Traders shouldn’t be surprised if gold prices spend most of the week trading sideways ahead of the Federal Reserve’s Jackson Hole Economic Policy Symposium.
Weekly Fundamental Gold Price Forecast: Neutral
- Gold prices (as well as other precious metals) continue to outperform in an environment defined by falling real sovereign yields – that is, inflation-adjusted yields remain in negative territory.
- Traders shouldn’t be surprised if gold prices spend most of the week trading sideways ahead of the Federal Reserve’s Jackson Hole Economic Policy Symposium.
- The IG Client Sentiment Index shows that gold prices in USD-terms (XAUUSD) may give back some of their recent gains in the days ahead.
See our long-term forecasts for Gold and other major currencies with the DailyFX Trading Guides.
Gold Prices Week in Review
Gold prices, no matter how you measure them, had another good week. Not one major currency gained ground against gold, with gold prices in EUR-terms (XAUEUR) leading the way higher with a 2.11% rally. Now, gold prices in EUR-terms (XAUEUR) are quickly approaching the all-time high established in October 2016; for many of the gold-crosses, fresh all-time highs have already been achieved (gold prices in AUD-terms (XAUAUD), gold prices in GBP-terms (XAUGBP), and gold prices in NZD-terms (XAUNZD) come to mind).
But the central focus of most market participants is gold prices in USD-terms (XAUUSD), and that too produced another strong week, adding 1.11%. Gold prices, regardless of the currency basis, have been on a strong run higher in recent weeks in part to the global monetary response to the US-China trade war; we’ll get clarification on the state of global easing this week as central bankers from around the world descend on Jackson Hole, Wyoming for the Federal Reserve’s annual Economic Policy Symposium.
Global Trade War Concerns Keep Gold Prices Elevated
Despite improved trading conditions for global equity markets in recent weeks, not much has changed in a positive manner along the US-led trade war front. Sure, there is a détente in the US-China trade war after the US tariffs at a clip of 10% on $300 billion of imported Chinese goods were pushed back from September 1 to December 15.
Yet there is a strong argument to be made with central banks unveiling more accommodative, dovish policy in recent weeks – a trend that is expected to continue – the fundamental backdrop for gold prices remains bullish in the long-term horizon. Falling sovereign bond yields (particularly German Bunds, UK Gilts, and US Treasuries since the start of May) continue to drop lower, and as a result inflation-adjusted yields remain in negative territory – good news for precious metals.
Volatility Tamped Down Ahead of Fed’s Jackson Hole Meeting
The Fed’s Jackson Hole Economic Policy Symposium this coming week should keep volatility tamped down in the days ahead. Traders typically don’t like to stake out significant positions ahead of the Fed’s annual summit; indeed, at the end of August, many trading desks have been left absent for summer vacation.
Beyond the prospect of an unforeseen development (see: US President Trump’s tweets) in the US-China trade war, the week leading into the Fed’s Jackson Hole Economic Policy Symposium is likely to be a quieter one – even if there are several significant pieces of data set to be released.
Other Top FX Events in Week Ahead
Early in the week, on Tuesday, gold prices in AUD-terms (XAUAUD) will be in focus with the release of the Reserve Bank of Australia’s August meeting minutes. Gold prices in AUD-terms (XAUAUD) are holding near their all-time highs ahead of the minutes. Elsewhere, the commodity currencies will remain in focus with the release of the July Canada inflation report on Wednesday, drawing attention to gold prices in CAD-terms (XAUCAD).
Elsewhere, gold prices in EUR-terms will come into focus with the release of the August Eurozone PMIs, particularly as odds for more easing from the European Central Bank at their September policy meeting have crept higher in recent weeks.
Net-Long Gold Futures Positioning Just Off the Yearly High
Finally, looking at positioning, according to the CFTC’s COT for the week ended August 13, speculators decreased their net-long gold futures positions to 290.1K contracts, down slightly from the 292.6K net-long contracts held in the week prior. The market is still the most net-long since September 2016 despite the slight moderation in bullish positioning.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at email@example.com
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