Commodities Precious Metals Forex EUR/USD GBP/USD USD/CHF

US dollar index: Greenback ready to give back gains?

As we approach the end of the year we can expect liquidity to drop. However this doesn’t always equate to lower volatility as the two are not always interlinked. This is because if there are fewer participants in the market, less effort is required to move it following an unforeseen or extreme event. With that in mind let’s look at a potential scenario for the Greenback as we enter the end of the year. 

USD Index stalls below 2009 high - for now...

The current bullish run from the 78 lows in April this year has covered a similar distance in points to the run from the 72 lows in 2011. However it has been achieved far quicker and with hardly any pullbacks. Price has stalled just below the 2009 highs and the markets are now focussing on the FED meeting on 17th December, their last of the year. 

It is widely expected that the FED will drop the “considerable time” comment which has partly fuelled the last run up towards the 2009 high. So what will happen if they don’t drop these key two words? I’d expect some irate USD bulls to dump their Dollars for starters – but when you take into account liquidity will be lower than we may be treated to a deeper pullback than we have seen throughout the entire bullish run.

 

Large Speculators shorting at the highs

 

Large speculators have a tendency to be good at what they do – speculating. So it is an interesting observation to see them increase their short positions as the USD Index breaks to new highs and reduce their long exposure. Whilst it does not time a market top with accuracy (as this is weekly data) it is something for you to consider before jumping in for buy and hold strategies over Christmas and beyond. 

Exactly why the sentiment has changed I cannot say. But the fact we can see there are some contrarians anticipating downside in the Dollar helps us prepare for any pullbacks (as let’s face it, we could probably do with one).

Signs of Dollar Tops elsewhere
Elsewhere we have a Bullish Wedge breakout on EURUSD, whilst USDCHF is on the cusp of confirming a Bearish Wedge. AUDUSD has a tendency to rally in the 2nd half of December (and remain bullish at the beginning of the year) and USDCAD is also exhibiting topping potential. GBPUSD and NZDUSD also returned back within range after a bearish ‘fakeouts’ this week and Gold is also looks increasingly bullish. All of the above points towards a retracement in USD. 

I am not trying to pick an ultimate top in the USD – we are far from it. But I do suspect a few complacent Bulls will be in for a nasty shock as price retraces, only to resume the clearly bullish trend without them next year. 

The FOMC meeting has the best potential this year for driving a USD retracement as any signs of dovishness will frustrate the USD Bulls and cause them to cover over the festive break. 

 

TECHNICALS: Near-term

Looking at the intraday timeframes there is support around 88 which may see a rally towards the 88.80 resistance. Due to the impulsive decline from the 89.62 highs I am expecting another leg lower, so we could fade into rallies towards 88.80, using a break below the 87.80 swing low as a signal for a bearish move towards 87.20 and 87.00. 

 

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