What will be the fate of the US Dollar in 2021? The battle between the bulls and bears remains fierce, and until now, there is no clear winner.
As the year started, most bank analysts anticipated a weaker US dollar, and in the first few days, that outlook looked right as the DXY declined by 0.81%. Yet, just six days into the New Year, the DXY started to trade higher and was up by 1.81% by February 4. The near term outlook is neutral, but the dollar index might be on its way to carving out a bearish head and shoulders pattern.
As we can see in the chart below, the February 17 high coincidences with the January 18 high to form what could be a symmetrical-head and shoulders pattern. The head is the 2021 high of 91.62, and a break to the neckline, and February low of 91.11, could be the start of a slide to the 88.59 level.
Talking against this bearish view is the IMM/COT positioning. Speculative positioning is clearly less long the EURUSD, yet they switched their positions to GBPUSD longs instead of just closing out their bearish USD bets. The U+S Dollar remains, therefore, extremely oversold against EUR, JPY, GBP, CHF, CAD, AUD, NZD, MXN, BRL, and RUB. We would need to go back to 2011 to see the market this bearish against the USD.
An alternative take on the market is that the Dollar index will ultimately trade above the right shoulder high at 91.05, and therefore trigger the so-called the “failed-head-and-shoulders-pattern.” This pattern suggests that a break to the right shoulder might lift the DXY to 92.57. The pattern target is derived by taking the difference between the neckline and head and adding it to the right- shoulder high. Ideally, the DXY would trade closer to the neckline before trying to take out the right- shoulder high. Nonetheless, this pattern is usually difficult to trade.
What is clear from all of this is that the DXY will most likely consolidate further in the days ahead.