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Will there be a bigger return in the US dollar quotes?
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Will there be a bigger return in the US dollar quotes?

created Daniel KosteckiJuly 4 2019

The American currency until recently was one of the strongest in the world, and the dollar index was at the two-year high. The dollar could benefit from the hawkish monetary policy pursued by Federal Reserve of the United Statesthat was in the cycle of interest rate increases. Currently, however, the situation may change.

Scenario: Possible retreat

With the strengthening of the US dollar, the euro weakened, and investors speculatively focused on the market only seemed to enlarge the plants allowing to gain with the weakening of the single currency against the USD. The faith in the weakness of the euro and the strength of the dollar was so great that the short positions among non-commercial investors on the contract for the euro increased to the levels last seen at the end of the 2016 year. It meant a fairly large sell-out on the market, which coincided with the change in the Fed's attitude and the sharp criticism of Donald Trump.

As a result, from the spring investors started to partially close short positions on the euro, most likely fearing the dovish attitude of the Federal Reserve, as well as further possible criticism from the US president towards a strong dollar. Donald Trump regularly hints that he does not like the strong American currency  and begins to accuse China and Europe of deliberately devaluing their currencies, which works to the disadvantage of the dollar.

Considering the possibility of further reduction of huge short positions on euro contracts with the possibility of FED's dovishness, monetary policy and Trump's criticism, and verbal interventions against the strong dollar, it is possible that a greater return is yet to come.

U.S. Dollar

Number of short positions among non-commercial investors on euro contracts. Source: tradingster.

If the short squeeze that was observed from October 2016 to June 2017 year would now be repeated, then EUR / USD exchange rate it could have risen to the top of the 2018 year.

strong usd

Short squeeze on contracts and translation into the EUR / USD exchange rate. Source: Conotoxia platform.

It seems that if the trend and appreciation of the dollar were to end, now there are quite a few potential arguments behind this.

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About the Author
Daniel Kostecki
Chief Analyst of CMC Markets Polska. Privately on the capital market since 2007, and on the Forex market since 2010.
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