The DXY has seen a big sell off and we are now looking for the bearish extreme to end. If we can breakout to the upside, we see a major rally unfolding.

Sentiment

We have a large net short position held by speculators on the COT Net Traders Positions, and we also have commercial hedgers,s smart money opposing them. The first chart shows the long-term view of speculative positioning, and the second chart shows speculators versus commercial hedgers.

Bad News Discounted?

In terms of the bearish extreme, forecasters and traders are heavily bearish, and below is a typical view:

"Despite the USD stabilizing over the past week - supported by a rebound in US equities, better-than-expected US figures and signs that the Trump administration is stepping back from its most aggressive tariff threats - there still appears to be a negative risk premium embedded in the greenback. What could drive further USD weakness, assuming trade policy uncertainty has peaked and continues to recede? While US soft data have consistently disappointed, this has yet to fully materialize in the hard data. That said, it may be only a matter of time before the weakness filters through, especially as there are already tentative signs of a softening labour market, despite the solid April NFP print." (DANSKE BANK)

The US economy is doing ok and will do far better than its rivals in a trade war and will also do better without trade wars. The yield on the USD is decent compared to other major currencies, and it's still a safe haven despite the market saying it's not.

“One month after the prevailing conventional wisdom was that US Treasuries are on their way out as the world's safest asset class (to be replaced by what Japanese bunds? Chinese bonds? Zimbabwean whachamacallits?) as a result of coordinated selling by China and basis trade unwinds, and which led to a plunge in Direct Bidders (offset by record foreign buyers), moments ago the US Treasury sold $42 billion in 10Y paper in a stellar auction, and all the concerns from one month ago now seem like a distant memory.” (ZEROHEDGE)

The market buys Dollars to buy debt, and the above comment was written yesterday. There is no shortage of buyers in the world's largest debt market, so it's still a safe haven market, and you need USD's to buy treasuries.

When Bad News Doesn't Push an Asset Lower

Over the last week,k after the USD has shown some strength and stabilization, the market forecasters continue to argue for it to go lower, but the DXY isn't going lower. This points to the bad news being in the price and a major rally, as speculators many short at lower levels get taken out of the market on stop

Technical Analysis

Below see our view of the key levels of support and resistance to look out for.