FX traders may stretch USD's elastic too far
Aug 28 (Reuters) -FX traders may stretch USD's elastic too far, selling too many dollars while hoping that the U.S. Federal Reserve embarks on an unlikely series of interest rate reductions that see an easing cycle almost completed 11 months after it has begun.
If expectations for the U.S. interest rate are overcooked and therefore resulting selling of the dollar overdone, the elastic that has been stretched will snap back and that's going to sting.
Currently the U.S. interest rate is expected to drop from 5.5 percent towards 3.25 percent by July next year from where it is not expected to fall much further.
Ahead of the first cut in September, traders have unloaded 28 billion dollars of the stockpile they held in April, and have sold short versus euro, pound, yen, and eight of the nine Asian currencies in a Reuters poll. They remain modestly short versus Mexico's peso.
The drop for the dollar index from 106.13 on June 26 to 100.53 on Aug 26 has become stretched well below the base of the 20-week Bollinger bands, and falls short of the 200-WMA at 100.33 and last year's low at 99.55.
Traders are increasingly bearish and will need to sell low to achieve breaks of vital levels. They are highly unlikely to get any help from rates markets, where expectations and pricing seem to have gone well beyond what the Fed might actually do.
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USD index https://tmsnrt.rs/4dZLFwZ
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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