Slowly but surely, the end of the trading year nears. November and December are tricky to trade because most institutional investors and retail ones adjust their portfolios ahead of the new year.
In some cases, profits are booked. To do so, the initial position is reversed, so the effect in the market is the opposite.
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For example, the best trade of the year was, by far, being long USD/JPY. For those willing to book the profits, a short position is needed to square the long.
In fact, being long the US dollar was profitable throughout the year. The Dollar index (DXY) reflects it perfectly. It shows how a basket of currencies, such as the EUR, CHF, GBP, or the CHF, have performed against the US dollar.
The chart below needs no words, as the bullish trend is more than evident. However, some signs of a reversal are in place, both from a technical and a fundamental perspective.
Triangle as a reversal pattern suggests more weakness lies ahead
A bullish trend comprises a series of higher and lower highs. Since 2022 started, the DXY has climbed higher and higher, trading close to 115 at one point.
But it found dynamic resistance at the upper edge of the bullish channel. Moreover, it was not able to make a new higher high.
Instead, a triangle as a reversal pattern may be spotted, and currently, the market is retesting the trendline.
Sure enough, while inside the rising channel, the bullish conditions persist. But a drop below 110 would mean that bulls have lost control of the narrative and a reversal is already in place.
Fed has hinted at a slowdown in the tightening cycle
The Federal Reserve has been one of the first central banks to tighten financial conditions the fastest. As such, the US dollar rose across the board, as other central banks (e.g., the European Central Bank) were slow to respond to the rise in the prices of goods and services.
But the Fed hinted last Friday that it intends to slow down the hiking pace. As a result, the market now has started to price in smaller rate hikes, while other central banks still have to catch up.
To sum up, the DXY appears to have topped around 114 area, and a drop below 110 would act as a confirmation that a reversal is in place. If inflation in the United States declines, then we might be in for a sharp reversal of the US dollar’s strength.
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