CFD: US Dollar: Sentiment Towards Econ Data Skews Near-term Risk to the Upside
It is unclear at this time as to whether the recent bounce in the Dollar is the beginning of a larger move higher, or simply a short-lived reprieve from the strong down move from the mid-April peak.
Previously, we examined the early 1980s bull market as a possible analog for how things could unfold with today’s bull market.
Excerpt from a note put out on April 16th:
“If we look at the most comparable run-up to our situation today, the early stages of the 1980’s USD bull market, we’ll see that the Dollar Index (DXY) retraced 38% of the first leg of the rally. If we follow that analog, then the DXY could retrace from just over 100 towards 92, and the USDOLLAR Index from its recent high of 12162 to 11463. The similarities in magnitude and time from then to now are striking: From breakout month to peak month, the 1980-1981 was 11 months in duration, gaining over 33%. Today’s rally is in its 10th month, and it rose from trough to peak nearly 26%.”
Given how closely things have unfolded so far between then and now, we will continue to stick with that analog until it stops working. With that in mind, intermediate-term risk to the downside is still in place with the potential for the USDOLLAR Index to move below 11500 at some point down the road. However, near-term risk still looks higher…
Today, we have U.S. CPI figures to be released at 12:30 GMT. Expectation for April Headline Inflation is -0.2% YoY, prior month -0.1%, and Core CPI to print 1.7%, prior month 1.8%. Economic data for some time now, in large part outside of employment, has been unfavorable for the Buck. With that in mind, poor market sentiment towards economic data skews risk to the upside. Simply put: It looks likely in the short-run traders will be more reactive to the upside on better numbers than to the downside on continued weakness in econ data.
From a risk/reward perspective, if the trend lower off the April high is to re-assert itself it would be most ideal to initiate positions against a steadfast level of resistance. This brings the 11900 level in USDOLLAR Index into focus.
Perhaps today’s data will lend a hand towards pushing it to that level. However, If we see another poor data print sending the index lower, we’ll be paying attention to how it reacts as it moves back towards 11634-11740 area. Remember, 11740 has been an important level since January.
