Originally published by AxiTrader
Key Takeaway
The convergence of a set of positives in the past 2 days which suggest the Fed is going to raise rates sooner and perhaps faster than markets expected.
That should have lifted the US dollar higher than where it sits this morning. But the price action, which saw the strong dollar reverse direction such that it is actually down against the yen and euro, is a warning for the bulls.
Looking at a chart of the US dollar index suggest that while last night's high stands the chance of a big fall is rising once again.
What You Need To Know
The US dollar is competing with crude oil for the mantle of the most crowded trade on the planet right now.
You can see that long US dollar trade in the CFTC data on forex futures. But it's also something that global investors recognise according to the latest Bank of America Merrill Lynch (NYSE:BAC) Global Fund Manager Survey.
The BAML survey showed that 41% of fund manager selected Long US dollar as the "most crowded trade".
Positioning is important when it comes to markets, assets, and currencies reaction to data and events. And last night's reaction where the strong retail sales, Empire State manufacturing survey, and solid rise in the US CPI for January initially drove the US dollar higher before the reversal suggests a long market has little ability to buy more dollars.
That's particularly the case when interest rate markets are rethinking their expectations about the timing of the next move by the US Fed in the wake of Janet Yellen's hawkish testimony before Congress over the past two days.
Indeed Boston Fed president Eric Rosengren said last night that given the strength of the economy and tightness in the labour market there was a chance of an "overshoot" in growth and as a result the Fed may need to undertake a "more rapid" rate tightening policy.
That's all dollar positive in the long run.
Yet the dollar's rally failed to hold.
When I look at a chart of the US dollar index I'm wondering if perhaps we are seeing a head and shoulders pattern being formed at the moment.
Naturally this is a highly speculative idea on my part right now.
But if the US Dollar Index closes down and through 100.65/70 that would signal a break of the trendline of the recovery from this month's lows and perhaps usher in a move back toward 99.20/50.
If that level breaks then a move toward 97.70/98 would be in the frame.
Obviously I could have the wrong end of the stick and traders will wake up to the obvious positives that a strong US economy and a Fed set on policy divergence with its central bank peers delivers to the US dollar.
But for me to be convinced the consolidation has ended and a new trend to US dollar strength has begun I'd have to see the DXY trade up and through 102.
Have a great day's trading.