With the Greenback soaring non-stop since the middle of the year, I’m pretty sure the question on every forex trader’s mind is “How long will these rallies last?”
A quick look at the weekly chart of the U.S. dollar index shows a strong upside break from a symmetrical triangle pattern, indicating that further long-term gains are in the cards. Heck, the USDX is already moving at its highest level in four years!
Rate hike expectations for the Fed have been fueling this strong run in the past few months, as FOMC members confirmed that they are already drafting a potential exit strategy. Even though Yellen tried to maintain her cautious tone in saying that policy changes are still data-dependent, there’s no denying that the Fed is on track to tighten sometime next year.
Risk sentiment is also favoring the safe-haven dollar at the moment, as a fresh batch of geopolitical tensions have stemmed from Hong Kong and China. Apparently, pro-democracy protesters have sparked civil unrest in Hong Kong, weighing on Asian equities and higher-yielding currencies. That’s on top of the ongoing Ukraine-Russia conflict and U.S. airstrikes against ISIS in Syria!
With that, several economists and forex hedge funds are pledging their allegiance to the U.S. dollar for the next few months. Last week’s CFTC positioning data showed that net long positions amounted to 238,056 contracts or roughly $35.1 billion, close to the record number of 311,052 contracts in June 2012. Of course this could also lead one to wonder… Is the dollar getting extremely overbought? Will we see a market top soon?
Some forex strategists are already calling an end to the dollar’s climb, warning that a market correction has been long overdue. Aside from that, a few Fed officials have also cautioned that a stronger dollar might wind up hurting growth and spurring disinflation.
For now though, there appear to be hardly any market catalysts that could force the dollar to return its recent gains, apart from potential profit-taking at the end of this month and quarter. Do you think the Greenback could sustain its rallies until the end of 2014?