US Greenback Bear Flag Breakout Begins

US Greenback Forecast Overview:

• The US Greenback (through the DXY Index) has fallen under uptrend help in place since 2011, providing one other piece of proof that the dollar is within the early phases of a longer-term decline.
• Contemporary highs in EUR/USD charges and extra weak spot in USD/JPY charges, amid one other flip decrease by US Treasury yields (each nominal and actual), is proving treacherous for the dollar.
• Retail dealer positioningsuggeststhat USD/JPY merchants are on combined footing because the pair retraces all of its positive factors in August.

US Greenback Bears Down

The primary half of August proved uneventful for the US Greenback (through the DXY Index), however the second half of the month is proving treacherous as soon as extra. The DXY Index stays embroiled in a downtrend relative to its coronavirus pandemic excessive set in March, whereas discovering additional traction to the draw back amid a break of longstanding technical help courting again to 2011.

The weak technical backdrop is proving fertile floor for one more deterioration in USD fundamentals, with US Treasury yields turning decrease; and extra importantly, actual US yields are pointing to the draw back once more. An surroundings outlined by detrimental actual yields stays tough for the US Greenback – as it could for any forex coping with such elementary moorings.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (August 2019 to August 2020) (CHART 1)

The DXY Index’s efficiency within the first half of August proved to stunt bearish momentum, however this was not an indication that the downtrend was completed. As famous in the US Greenback forecast final week, “The sideways vary carved out, between the 2011/2018 trendline help and the 38.2% Fibonacci retracement (of the 2017 excessive/2018 low vary) as resistance and the August low as help, yields a variety of 92.85 to 94.20. Contextually, this might be a bear flag: the favored decision would seem like to the draw back.” Now that contemporary yearly lows have been achieved, the measured transfer requires a drop right down to 91.50.

DXY PRICE INDEX TECHNICAL ANALYSIS: WEEKLY CHART (August 2011 to August 2020) (CHART 2)

We’ve beforehand said that “having already traded under the rising channel help in addition to the 38.2% retracement of the 2017 excessive/2018 low vary at 94.20, the DXY Index faces a longer-term bearish breakdown.” With the US Greenback bear flag breakdown starting on the every day timeframe, focus shifts to the weekly chart.

Technical momentum stays bearish and is now accelerating, with the DXY Index buying and selling under the weekly 4-, 13-, and 26-EMA envelope (nonetheless is in bearish sequential order). Weekly MACD is trending decrease in bearish territory, whereas Gradual Stochastics are nestled in oversold territory.

The longer-term channel breakdown that will counsel extra important losses over the approaching months – maybe in the direction of 88.00 – stays the bottom case situation. Invalidation would happen above 94.20.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2019 to August 2020) (CHART 3)

USD/JPY charges have discovered important observe by way of decrease after carving out a bearish night star candle cluster over the ultimate three buying and selling days of final week. As famous within the Japanese Yen weekly technical forecast, “traders shouldn’t rule out extra weak spot, if solely to retrace current positive factors.” To this finish, USD/JPY charges have retraced all of August’s positive factors so far. Gradual Stochastics have pulled away from overbought territory, and every day MACD has turned decrease under its sign line, confirming the ‘decrease excessive’ established by USD/JPY charges in August (relative to what was seen in June or July).

Whereas it nonetheless holds that “the second half of August usually caters to comparatively calmer buying and selling circumstances that portend to vary buying and selling over breakouts,” extra USD/JPY weak spot in the direction of the July low close to 104.19 can’t be dominated out.

IG Consumer Sentiment Index: USD/JPY RATE Forecast (August 18, 2020) (Chart 4)

USD/JPY: Retail dealer information reveals 57.88% of merchants are net-long with the ratio of merchants lengthy to brief at 1.37 to 1. The variety of merchants net-long is 12.55% decrease than yesterday and seven.66% decrease from final week, whereas the variety of merchants net-short is 12.43% larger than yesterday and 25.10% decrease from final week.

We usually take a contrarian view to crowd sentiment, and the actual fact merchants are net-long suggests USD/JPY costs could proceed to fall.

Positioning is much less net-long than yesterday however extra net-long from final week. The mix of present sentiment and up to date modifications provides us an extra combined USD/JPY buying and selling bias.

Learn extra: Central Financial institution Watch: BOE, ECB & Fed Charge Expectations; EUR/USD, GBP/USD, USD/JPY Positioning Replace

— Written by Christopher Vecchio, CFA, Senior Forex Strategist