Determined rally from the USD has pushed it into resistance
Let us turn our focus on recent major currency pair exchange rates. We are looking at the G3 currencies here, which include the US dollar, euro and the yen. The dollar has been gaining strength since early May of this year, when a major price reversal was put in place. So far, the currency has mainly rallied against the Euro, as we covered in one of the recent blog posts. Personally, I think the US Dollar Index has started another leg of its bull market and this strength will continue.
Euro has now become oversold over the short term
However, that does not mean one should run out and buy some euro shorts or dollar longs almost immediately like a blind bat. The trade has become recognised and whenever speculators catch onto a trend, they all pile in at once. As we can see in Chart 1, USD Index has reached a short term resistance zone. The probability is pretty decent that the reserve currency might pause and pull back right here. At the same time, the European Euro has become technically oversold from the short term perspective, as it trades more then 2 standard deviations away from the 50 day mean. It has also reached one of its recent support zones, where buyers should be present. Therefore, a relief rally could now follow.
As a side note, regular readers of the newsletter should know that I held a long position in the Japanese Yen on the FXY ETF around $96, which is equivalent to about 101 on the exchange rate pair (refer to Chart 3 below). With the triangle compressing in the last few weeks, I tightened my stop loss, which was finally trigged at 101.85 on Thursday (Asian time) for a minuscule loss. I went long USD vs JPY at just below 102 on a recent technical breakout.
In other words, I am now shorting the yen, which is one of the most overcrowded trades. A tight stop is necessary to keep risks down, because I never like being on the same side of the boat as majority of the other traders!
Dollar has recently broken out against the Yen
