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Is there an opportunity for the U.S. dollar index in crisis? Extreme short positioning suggests historic rally is coming
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Decision Analysis]: Is the U.S. dollar index in crisis or opportunity? Extreme short positions suggest that a historic rebound is www.xmtraders.coming." Hope this helps you! The original content is as follows:
During the Asia-Europe trading session on Wednesday (November 26), the U.S. dollar index emerged from a wide-ranging trend of bottoming out and rebounding. It is currently trading around 99.79. Affected by the data, traders are optimistic about the U.S. interest rate cut in December. The continued rise in expectations pushed the U.S. dollar to continue to hit the bottom in early trading. At the same time, the news of the postponement of the signing of the Russia-Ukraine peace agreement and the covering of bulls after the short positions were excessively increased boosted the U.S. dollar index. Finally, it continued to fluctuate widely under the influence of the UK's unexpected fiscal plan and U.S. data.
The British budget exceeded expectations, and the US dollar index fell slightly
As the third largest weight in the US dollar index (accounting for 11.9%), the British pound was significantly boosted by the impact of the domestic annual budget exceeding expectations. The OBR report showed that the British government’s fiscal buffer space reached 22 billion pounds, significantly higher than the previous market expectation of 15 billion pounds. This larger-than-expected fiscal surplus supported the pound, thereby suppressing the dollar.
Weekly initial jobless claims were continued, and durable goods exceeded expectations slightly boosted the dollar
The number of initial jobless claims in the United States in the week ending November 22 was 21.6, slightly lower than the market expectation of 225,000, while the number of continued jobless claims was 1 96 was slightly lower than the market expectation of 1.966 million. At the same time, the September durable goods data increased by 0.5% year-on-year, which was higher than the market expectation of 0.3%. Boosted by these three data, the U.S. dollar index rebounded slightly, basically offsetting the previous decline caused by the rapid rise of the pound.
Congested short positions suggest that the U.S. dollar index may rebound:
The extreme short position of hedge funds suggests that history may repeat itself. Hedge funds are shorting the U.S. dollar in an aggressive manner, causing an extreme short pattern to emerge, and the degree of imbalance in their positions has reached 20One of the highest levels in years.
The position index shows that funds are currently deep in the "extreme short" range, and historical patterns imply rebound risks
Analyst Guillerme Tavares focused on interpreting this pattern and warned that trading congestion has reached dangerous levels. He wrote in the report: "Hedge funds hold a large number of short positions on the U.S. dollar index (that is, long positions have plummeted). Judging from historical data, similar position levels often breed solid buying opportunities-at least short-term rebound opportunities. When a transaction is extremely crowded, reverse Directional operations usually have trading value. "
Looking back over the past two decades, every large-scale concentrated shorting of the U.S. dollar ended up in the same path: the U.S. dollar triggered a rebound, forcing fast money traders to passively close their positions, thereby boosting the U.S. dollar to strengthen further. This historical pattern means that the current downward trend of the US dollar index may face the risk of periodic reversal.
Weak consumption and employment data, controllable inflation paves the way for interest rate cuts, suppressing the dollar's rebound
The U.S. economic data released on Tuesday fell short of market expectations, directly pushing up the pricing probability of the Federal Reserve cutting interest rates next month, putting a full pressure on the dollar. Data from the U.S. Census Bureau showed that retail sales increased by only 0.2% month-on-month in September, lower than the previous value of 0.6% and less than the market expectation of 0.4%, highlighting the weakness on the consumer side.
Data released by Automatic Data Processing (ADP) on Tuesday showed that in the four weeks to November 8, private employers laid off an average of 13,500 people per week, a significant expansion from the previous decrease of 2,500. Consumption data was less than expected, and the unexpected upset of employment data significantly suppressed Wall Street sentiment.
The U.S. Producer Price Index (PPI) rose 2.7% year-on-year in September, which was the same as the revised 2.7% in August (initial value 2.6%), in line with market expectations; the core PPI (excluding energy and food price fluctuations) rose 2.6% year-on-year, lower than the previous revised 2.9% (initial value 2.8%), and less than the market consensus of 2.7%. The stickiness of inflation has eased.
The probability of an interest rate cut in December has increased, suppressing the U.S. dollar index
A series of weak economic data in the United States, www.xmtraders.combined with increasingly clear dovish signals from senior Federal Reserve officials, prompted investors to reprice the path of interest rates.
The current market expectations are clearly biased towards an interest rate cut in December. The dovish stance of Fed officials, coupled with moderate inflation and weak consumer and labor market data, all point to the need for loosening policies in December. CMEFedWatch interest rate futures have currently stabilized at around 85%.
Nvidia is negative for U.S. stocks but does not fall, which contrasts with market resilience and is positive for the U.S. dollar index
It is worth noting that the S&P 500 index rebounded on Monday after four consecutive weeks of decline, and the Nasdaq www.xmtraders.composite Index rose sharply by more than 2.5%. But in early trading today, the stock price of artificial intelligence leader Nvidia (NVDA) fell 3% due to media reports that Metaverse Platform www.xmtraders.company (META)We are considering using AI chips from Alphabet www.xmtraders.company (GOOGL). Liz Ann Sanders, chief investment strategist at Charles Schwab Research Center (SCFR), and Kevin Gordon, head of macro research and strategy, pointed out that the recent weakness in sectors such as digital currency and quantum www.xmtraders.computing "reflects that the market is in a position adjustment phase" and Monday's rebound "shows that the logic of buying on dips has not expired, and seasonal factors generally provide support for the rebound at the end of the year."
Focus on:
The U.S. Chicago PMI and new home sales month-on-month data for November will be released later on Wednesday. At the same time, the Federal Reserve will release the important economic Beige Book early Thursday morning, which will serve as an important material to verify the Fed's 80% probability of maintaining an interest rate cut in December.
Technical analysis:
Regarding the three most important lines of the U.S. dollar index in the near future, the index currently fell below the recent red upward trend line, but maintained the orange original upward trend line and the key price of 99.36, which means that from a trading perspective, the U.S. dollar still has a chance to rebound.
However, www.xmtraders.combined with the fundamentals, that is, recent U.S. data and Federal Reserve officials’ speeches have increased bets on interest rate cuts in December, www.xmtraders.combined with the easing of relations between Russia and Ukraine, the ongoing U.S. government shutdown, and the realistic conditions of government debt hitting new highs, the U.S. dollar index may experience a resistive decline and then gradually fall below these three key support lines.
The above content is all about "[XM Foreign Exchange Decision Analysis]: Does the U.S. dollar index have an opportunity in crisis? Extreme short positions hint that a historic rebound is www.xmtraders.coming". It is carefully www.xmtraders.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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