USD Q2 2021 Technical Forecast

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Technical Analysis: US Dollar Begins with a Bounce but the Big Bear Still Lurks

It was a bizarre beginning to a New Year for the US Dollar, but given 2020 I’m not sure how surprising it should be. The US Dollar came into 2021 after a very clear and strong one-sided trend enveloped the currency for the final 8 months of last year. Around the 2021 open, the US Dollar was flashing oversold conditions while also working on a falling wedge formation, which is often approached with the aim of bullish reversals.

As I had written in the Q1 Tech Forecast for the US Dollar, I did expect a counter-trend move to show up on the basis of that context. But where I went wrong was my expectation that a prolonged bout of USD-strength would likely emanate from risk aversion. Instead, the continued bullish push in the US Dollar in Q1 was more related to the rates theme as US Treasury Yields jumped by as much as 90% during the period.

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In a bizarre twist, it is that same driver highlighting optimism around a faster return-to-normal that may become a bearish driver in and of itself. We’ve started to see hues of risk aversion as rates on the 10-year note have topped above 1.6%. Throughout the quarter the Fed has remained as dovish as can be, even telling market participants that they’re planning on shrugging off above-target inflation prints. So, at this point, a similar root cause that I’d noted in Q1 appears to remain at play, as longer-term shorts in USD have continued to be squeezed as the sell-off has stalled, helped along by the rates picture that’s helped to keep buyers on the bid behind the USD.

On the below monthly chart of the US Dollar, we can see the three consecutive months of strength after price action tested a confluent area of support – plotted around the 90.00-level which is very close to the 38.2% Fibonacci retracement of the 2001-2008 major move.

US Dollar Index (DXY) – Monthly Timeframe (2001 to Present)

USD Q2 2021 Technical Forecast

Source: TradingView; Prepared by James Stanley

US Dollar Pullback Pushes Towards Resistance Barriers

At this point, the US Dollar is testing above the 23.6% retracement of last year’s bearish move. But, this also highlights the relative size of this bullish theme in comparison to last year’s sell-off.

And, as noted above, the fact that higher rates being driven by optimism may create a risk-off scenario is somewhat of a highlight of where we are: In a market that may have difficulty holding up without the support of Central Banks, especially the Fed.

At this point, the bullish push does appear to be a corrective move in the bigger-picture theme of weakness in the US Dollar. On the weekly chart below, resistance potential around the 94-94.47 area is noted, and a bit-higher is another confluent zone around the 96.00 handle. As for support – the visible area around the two-year-lows, right around the 90.00 psychological level looms ominously below current price action.

Dollar Index (DXY) – Weekly Timeframe (Late 2017- March 2021)

USD Q2 2021 Technical Forecast

Source: TradingView; Prepared by James Stanley

Q2 2021 Forecast for the US Dollar: Bearish

The quarterly technical forecast will remain bearish for the US Dollar, driven by the assumption that the Q1 bullish push was a counter-trend pullback in a longer-term bearish theme for the Greenback.

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On a larger scale, the level at 95.89, mentioned above, is key for long-term trend diagnostics. This is the 50% marker of the 2001-2007 major move. This price also set a quick spot of support in June and July during the USD’s momentous sell-off last year, but hasn’t returned to the picture since. If buyers are able to pose a sustainable break above this price, then the sell-off can be seen as nullified and, likely, we’ll be dealing with some very different scenarios of higher rates and/or risk aversion across global markets.

Dollar Index (DXY) – Monthly Timeframe (Late 1999 – March 2021)

USD Q2 2021 Technical Forecast

Source: TradingView; Prepared by James Stanley

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