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Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

Technical Forecast for the US Dollar: Neutral

  • The US Dollar (via the DXY Index) has once again rebounded from rising trendline support from the May 2021 and January 2022 swing lows.
  • US Dollar net-long positioning decreased slightly, a continued drop from its most net-long level since October 2019.
  • The IG Client Sentiment Index suggests that the US Dollar has different biases against its three major counterparts.

US Dollar Rates Week in Review

Following the brutal sell-off that kicked off the month – the first week of February produced the largest decline since November 2020 – the US Dollar (via the DXY Index) recovered modestly last week. The DXY Index gained +0.58%, with most of the gains accumulating on Thursday and Friday, after the January US inflation rate report (CPI) and news that Russia was moving closer towards invading Ukraine. Driving the move was EUR/USD, which fell by -0.92%. Other USD-pairs were relatively stable: USD/JPY rates added +0.24%; GBP/USD rates gained +0.15%; and USD/CAD rates fell by -0.25%.

For full US economic data forecasts, view the DailyFX economic calendar.

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

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

Last week it was noted that “with a daily bearish outside engulfing bar forming, the charts are telling us that 96.00 must be overtaken before any broad-based bullish point of view is to be taken seriously in the near-term…while rising US Treasury yields and higher Fed rate hike odds suggests that a greenback sell-off should be limited.”These conditions have prevailed, as the DXY Index closed the week at 96.03.

In turn, the technical outlook is turning more bullish, or rather, price action has lost its bearish characteristics. The DXY Index is back above its daily 5-, 8-, 13-, and 21-EMA envelope, but the moving averages are not yet in bullish sequential order. Daily MACD is rising, but hasn’t turned higher nor has it cleared its signal line. Daily Slow Stochastics are out of oversold territory, but have yet to clear their median line.

Further upside may be ahead for the DXY Index, but momentum indicators are lacking bullish conviction – for now.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 2)

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

It’s been previously noted that “a move below 1.1385 – former resistance in the triangle that was forming between November 2021 and January 2022 – would be a strong indication that the double top was the valid interpretation of price action.” Indeed, EUR/USD rates are back below the descending trendline from the May and September 2021 swing highs, having failed at familiar resistance that capped gains earlier this year: the 50% Fibonacci retracement of the 2017 low/2018 high range; and the 50% Fibonacci retracement of the 2020 low/2021 high range. Now below their daily 21-EMA (one-month moving average), it “appears that a double top has formed just shy of 1.1500.

IG Client Sentiment Index: EUR/USD Rate Forecast (February 11, 2022) (Chart 3)

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

EUR/USD: Retail trader data shows 50.71% of traders are net-long with the ratio of traders long to short at 1.03 to 1. The number of traders net-long is 6.23% higher than yesterday and 13.61% higher from last week, while the number of traders net-short is 21.92% lower than yesterday and 32.52% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.

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

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

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

GBP/USD rates are holding above the descending trendline from the June 2021 and October 2021 swing highs, but momentum is lacking. Five of the past six sessions have seen the pair touch its daily 21-EMA, with long upper wicks indicating that buyers have been unable to sustain any rally efforts. The daily EMA envelope is flat, while daily MACD is holding steady right at its signal line. More sideways chop and grind appears to be in the future for GBP/USD rates, between 1.3500 and 1.3700.

IG Client Sentiment Index: GBP/USD Rate Forecast (February 11, 2022) (Chart 5)

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

GBP/USD: Retail trader data shows 51.06% of traders are net-long with the ratio of traders long to short at 1.04 to 1. The number of traders net-long is 7.82% lower than yesterday and 8.72% lower from last week, while the number of traders net-short is 2.25% lower than yesterday and 3.30% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.

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

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

It remains the case that “a symmetrical triangle may be forming since late-November, which in context of the preceding move, would look for resolution higher, USD/JPY rates appear to be in the early stages of their next leg to the topside.” If news around Russia-Ukraine tensions accelerate, however, a move lower by global equity markets coupled with a flight to safety dragging down US Treasury yields could upend the bullish outlook for the pair.

While USD/JPY rates rebounded from their daily 21-EMA last week, the pair is on the cusp of returning into its symmetrical triangle. There are early signs that bullish momentum is fading. Daily MACD has started to narrow and turn lower (albeit above its signal line), while daily Slow Stochastics may soon drop from overbought territory. If USD/JPY rates do return into their symmetrical triangle, it could be a quick drop into triangle support near 114.00 over the coming days.

IG Client Sentiment Index: USD/JPY Rate Forecast (February 11, 2022) (Chart 7)

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

USD/JPY: Retail trader data shows 28.86% of traders are net-long with the ratio of traders short to long at 2.46 to 1. The number of traders net-long is 14.77% lower than yesterday and 25.73% lower from last week, while the number of traders net-short is 16.90% lower than yesterday and 7.44% higher from last week.

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

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

CFTC COT US Dollar Futures Positioning (February 2020 to February 2022) (Chart 8)

Weekly Technical US Dollar Forecast: Uptrend Intact, but Divergence Among USD-pairs

Finally, looking at positioning, according to the CFTC’s COT for the week ended February 8, speculators slightly decreased their net-long US Dollar positions to 33,725 contracts from 34,517 contracts. Net-long US Dollar positioning continues to pullback from its highest level since October 2019, though at a slow pace. It remains true that long positioning remains overcrowded, a veritable headwind for significant upside in the DXY Index in the near-term.

— Written by Christopher Vecchio, CFA, Senior Strategist

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