Weekly Technical US Dollar Forecast: Failed Bullish Breakout Potential

TECHNICAL FORECAST FOR THE US DOLLAR: NEUTRAL

  • The US Dollar (via the DXY Index) closed below ascending triangle resistance, an indication that the recent bullish breakout attempt may have failed.
  • After declining for four consecutive weeks, net-long US Dollar positioning in the futures market has increased in back-to-back weeks.
  • The IG Client Sentiment Index suggests that the US Dollar has a bearish bias against its three major counterparts.

US DOLLAR RATES WEEK IN REVIEW

What started off as a strong week ended on weaker footing for the US Dollar. Driving the move were EUR/USD rates, which gained +0.92% despite turbulence around the September ECB rate decision. After hitting fresh yearly lows, GBP/USD rates added +0.68%. The outlier among the major USD-pairs were USD/JPY rates, which notched another +1.77% rally.

After closing above ascending triangle resistance in the prior week, the DXY Index’s -0.58% decline in the first full week of September marks a potential failed bullish breakout, with the dollar gauge returning back into its consolidation.

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

DXY INDEX PRICE TECHNICAL ANALYSIS: DAILY CHART (SEPTEMBER 2021 TO SEPTEMBER 2022) (CHART 1)

The return into ascending triangle consolidation suggests that the DXY Index may be biased towards a swing lower in the near-term. One potential catalyst on the horizon could be the August US inflation report (CPI), which is expected to show signs of further decelerating price pressures.

Accordingly, the technical outlook is turning more bearish, or rather, price action has lost its bullish characteristics. The DXY Index is below its daily 5-, 8-, 13-EMAs, but the moving average envelope is not yet in bearish sequential order. Daily MACD is falling, but remains well-above its signal line. Daily Slow Stochastics are out of overbought territory, but have yet to drop below their median line.

A move below the daily 21-EMA (one-month moving average), which the DXY Index has not closed below since August 14, would reinforce the view that the dollar gauge’s recent bullish breakout attempt has failed.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (SEPTEMBER 2021 TO SEPTEMBER 2022) (CHART 2)

EUR/USD rates set a fresh yearly low last week before closing higher on Friday. It’s worth noting that the pair completed the measured move of the April through July range at 0.9892. EUR/USD rates appear to be positioned for a short-term rebound. Momentum has started to turn bullish, with the pair closing above its daily 5-, 8-, 13-, and 21–EMAs, even though the EMA envelope is aligned in bearish sequential order. Daily MACD is trending higher albeit below its signal line, while daily Slow Stochastics are trending higher above their median line. The close above the daily 21-EMA (one-month moving average), which happened for the first time since August 12, offers greater confidence of a short-term bottom forming.

IG CLIENT SENTIMENT INDEX: EUR/USD RATE FORECAST (SEPTEMBER 9, 2022) (CHART 3)

EUR/USD: Retail trader data shows 60.65% of traders are net-long with the ratio of traders long to short at 1.54 to 1. The number of traders net-long is 13.85% lower than yesterday and 11.34% lower from last week, while the number of traders net-short is 7.52% higher than yesterday and 19.45% higher 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.

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

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (SEPTEMBER 2021 TO SEPTEMBER 2022) (CHART 4)

After setting a fresh yearly low last week, GBP/USD rates are starting to exhibit signs of a short-term bottom. The pair is above its daily 5- and 8-EMAs, though has yet to clear the daily 13- and 21-EMAs; the EMA envelope is still in bearish sequential order. Daily MACD is nearing a bullish crossover while below its signal line, and daily Slow Stochastics have moved out of oversold territory. A return above the daily 21-EMA (one-month moving average) and the July low – the zone near 1.1712/60 – would increase confidence in a bottom having been formed.

IG CLIENT SENTIMENT INDEX: GBP/USD RATE FORECAST (SEPTEMBER 9, 2022) (CHART 5)

GBP/USD: Retail trader data shows 76.91% of traders are net-long with the ratio of traders long to short at 3.33 to 1. The number of traders net-long is 8.20% lower than yesterday and 0.26% higher from last week, while the number of traders net-short is 7.50% higher than yesterday and 36.62% higher 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)

After rallying to freshy yearly highs, USD/JPY rates reversed sharply at the end of the week – though not enough to erase the sizeable gains accumulated between Monday and Thursday. Among the three major USD-pairs, USD/JPY rates offer the least confidence in US Dollar weakness, insofar as momentum remains quite bullish. The pair is still above the daily 5-, 8-, 13-, and 21-EMA envelope in its entirety. Daily MACD is still trending higher while above its signal line, and daily Slow Stochastics remain in overbought territory. If the US Dollar is to selloff over the coming days, USD/JPY rates may be the laggard relative to EUR/USD and GBP/USD rates.

IG CLIENT SENTIMENT INDEX: USD/JPY RATE FORECAST (SEPTEMBER 9, 2022) (CHART 7)

USD/JPY: Retail trader data shows 22.96% of traders are net-long with the ratio of traders short to long at 3.35 to 1. The number of traders net-long is 4.94% lower than yesterday and 1.45% higher from last week, while the number of traders net-short is 11.45% lower than yesterday and 1.32% lower 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.

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

CFTC COT US DOLLAR FUTURES POSITIONING (SEPTEMBER 2020 TO SEPTEMBER 2022) (CHART 8)

Finally, looking at positioning, according to the CFTC’s COT for the week ended September 6, speculators slightly increased their net-long US Dollar positions to 36,146 contracts from 35,541 contracts. This is the second consecutive increase in net-longs followed four straight weeks of declines. Overall, net-long US Dollar positioning persists near its most extreme levels in over five years. It remains true that long positioning is still overcrowded, a meaningful headwind for the DXY Index in the near-term.