Dollar stands resolute in challenging the consensus, is the tide starting to shift?

The dollar is taking a crack at key levels across multiple charts this week

USD

At the end of last year, the widely accepted consensus is that the dollar looks set for an extended period of decline this year (at least for the first half) but how things have changed in the opening three months.

The reflation theme gathered pace much quicker than most would expect, with Treasuries routed and that helped to provide an indirect lift to the greenback.

Adding to that now is that the US recovery is set to outpace most of everywhere else across the globe and that’s another reason to be more bullish on the greenback, adding to the trillions of stimulus measures introduced by Biden since the new year.

While the market may have gotten ahead of itself with regards to the reflation narrative and central banks have pulled the brakes on that, at least for now, the dollar is also still able to benefit from safety and haven flows as proven so far this week.

In fact, this is proving to be enough for the dollar index to rise to its best levels on the year and taking a look at testing its 200-day moving average for the first time sine June:

DXY

Elsewhere, the dollar is contesting key levels across multiple fronts:

  1. EUR/USD has broken its own 200-day moving average and taking a look towards testing 1.1800 next;
  2. GBP/USD is sinking further and targeting its 100-day moving average @ 1.3619;
  3. AUD/USD is slipping below its own 100-day moving average below 0.7600;
  4. NZD/USD has cratered below its 100-day moving average in trading yesterday to fall under 0.7000 today.
This comes after CFTC positioning data last week showed that leveraged funds have shifted to being net long the dollar instead. Adding to that is some institutional calls turning to favour the dollar instead – namely BofA and Barclays.

Judging by broader market sentiment, I don’t think there’s a major shift in the consensus yet – in that the dollar is going to be a “buy against everything” as was the case with the taper tantrum back in 2013-14.

That said, I do believe that we are heading towards such a position at some point – especially if the US outpaces other major economies in the recovery i.e. the Fed will be one of the quicker ones to remove more accommodative monetary policy.

While we may not be there yet, one just can’t simply ignore what the charts are saying either. As the technicals get stretched and broken down, it would be unwise to not take that into consideration for what is happening in the market now.

Is the reflation narrative suddenly starting to fall flat? Not really. The market has gotten ahead of itself a little in the first few months and we now have to wait on economic data to back up all the expectations and anticipation.

Until then, the charts point to some potential pain in the short-term and we have to play along with what that is telling us too.

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