Traders have become less bullish on the USD recently. As of last Tuesday, traders had reduced net-long exposure on DXY to a 6-week low. Bullish exposure fell -6.2k contracts (its largest bullish reduction since March) and the move was fuelled by closure of longs and increase of shorts. Furthermore, net-short exposure for CAD, CHF, EUR, GBP and NZD was reduced and net-long exposure on CAD futures saw an increase against the dollar.
With the CME FedWatch tool implying a 95.7% chance the Fed will cut by 25 bps on Wednesday, the cut may well already be priced in. We’d therefor likely need a dovish cut (via the press conference) to see a notable downside move for the dollar. However, as previous analysis has shown, the USD dollar tends to appreciate following a Fed cut. Whilst the average forward return suggests gains are more likely between 3-10 day after a cut, DXY has risen on the day of the cut in July and September this year.
Last week’s bullish candle snapped a 3-week losing streak and saw prices remain above the 97, with the 50-week eMA acting as support. Whilst the broad bullish channel allows for further downside, the typical correction of ‘around’ 2.5% from its highs this channel has become accustomed to has been achieved, so it’s possible we may have seen the low.
Switching to the daily chart, the bounce from 97 occurred and prices are now having around the September lows. It’s failure to hold below the 200-day eMA is worth noting as when this occurred in June, it was the beginning of its break to new highs. A dark cloud cover has occurred at the highs with the 100-day eMA capping as resistance, and a dovish cut and / or knee jerk reaction following the Fed meeting could see this level continue to hold over the near-term. However, whilst prices remain above 97 the bias is for a break to new highs. Although with the Fed meeting less than 48 hours away, it’s possible prices could remain rangebound until the press conference.
As for EUR/USD, a bullish 2-day bar reversal is apparent above 1.1070 support to suggest a minor bounce could be on the cards. Although the 200-day eMA has remained unchallenged and continues to point lower. If we’re bullish on DXY, then clearly we’re going to be bearish on EUR/USD due to their strongly inverted correlation (DXY is heavily weighted towards the Euro at around 57%). A firm break below 1.1070 opens up a run towards 1.10, whilst a break above 1.12 suggests price are to retrace towards the upper bounds of the bearish channel.
- Invesco DB USD Dollar index Bullish CFD/DTF
- USD Index (per 0.01) CFD/DFT
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