Somewhat disconcerting for dollar bulls, however, was the big reversal we saw play out over the course of the trading session yesterday. Not only did the buck finish well below its high point of the day, but it also closed lower than both the open and close of the previous two sessions.
Look at the candlestick chart of the U.S. dollar index below to help understand this:
Dollar Index Hits a Three-Year High
The three-bar pattern I’ve circled does not represent an official bearish reversal pattern – at least as far as general candlestick analysis goes. But the engulfing nature and timing of the third bar in that pattern is cause for attention.
Yesterday’s session alone showed a big time loss for dollar buyers. The sellers emerged strongest on the day. The buyers couldn’t hold the new highs. And they couldn’t hold the highs, closes or even the opens of the two prior sessions either. The sellers dominated the trading day.
This morning, on the other hand, the U.S. dollar is bouncing back relatively quickly. This strength isn’t entirely out of the ordinary, but it’s somewhat surprising considering the overly bearish session yesterday. Why haven’t traders running from the U.S. dollar?Why Aren’t Traders Running from the Buck?
Could be a lot of reasons ... really.
Could be the fact that currency traders are reacting to the risk environment (i.e. stocks are lower and thus pushing up the U.S. dollar).
It could be the fact that the Bank of England and European Central Bank reminded traders that global central banks are converging on Federal Reserve interest rates (i.e. BOE cut to a record low of 0.5%; ECB to 1.5%). It could be that the world is being pressured to “Go Green!”
But on top of all those things, there may have been a clue that today wouldn’t be destined to follow yesterday’s bearish footprints.
After yesterday, when price action was hinting at reversal, a colleague sent us a summary of yesterday’s FX at-the-market options’ volatilities.
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