Here's What The Smart Money Thinks About The Dollar And Euro
CONTRIBUTOR-forex-trading
What a difference eight months make: at end of last year, the U.S. dollar, interest rates, and inflation expectations were soaring on the back of Donald Trump's surprise election win. Even though the underlying "hard" economic data had not changed much, the "soft" data (sentiment-based economic indicators) immediately jumped as investors expected imminent tax cuts and economy-boosting fiscal stimulus programs. Over the past several months, however, investors have been disappointed by the Trump administration's lack of progress toward its goals.
The disappointment can be seen in the U.S. Dollar Index's false breakout. For most of 2015 and 2016, the U.S. Dollar Index was trading in a range between the 93 support and 100 resistance. A breakout above 100 occurred after the election, but could not be sustained. The Dollar Index is now approaching its old 93 support level that should help determine whether there will be a bounce from here or a further breakdown. A convincing break below this 93 support level increases the chances of further downside (assuming no false breakdown, of course). It is worth noting that the commercial futures hedgers (often considered "smart money") have built a relatively bullish position on the U.S. Dollar Index, which increases the likelihood of a bounce in the near future. There have been notable rallies the last several times the hedgers built similar bullish positions in the U.S. Dollar Index.
Dollar Weekly Chart Finviz.com
Dollar Weekly Chart
Weakness in the U.S. dollar along with discussions of a scale-back of the ECB's quantitative easing program have contributed to strength in the euro, which trades inversely with the U.S. dollar. Similar to the dollar, the euro traded in a range for most of 2015 and 2016, but recently experienced a bullish breakout above the 1.1500 resistance level. The commercial futures hedgers have built their most bearish position in years, which means that they are positioning for a pullback. If such a pullback occurs, watch the 1.1500 support level.
Euro Weekly Chart Finviz.com
Euro Weekly Chart
For now, traders should watch how the U.S. Dollar Index acts at the 93 support level (whether a bounce occurs or if there is a convincing breakdown). In addition, traders should watch if the euro is able to sustain its momentum after breaking above 1.1500 or if it experiences a pullback to this level.
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(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)
