The US dollar was very popular among investors who led to an increase in its value to levels that have not been observed for two years. The American currency with the greatest confidence seemed to be rising thanks to higher interest rates or capital transfers along with fears of a global economic slowdown.
As a consequence, investors got very involved in USD long positions, which can be seen on the basis of positioning on futures contracts. Leveraged funds in the second half of October once again began to accumulate positions allowing to earn at the moment of the dollar's appreciation. Thus, net long positions were at their highest point in eight months, they also increased to levels that can be considered as overbought levels in this market.
USD futures contracts with leveraged funds net long positions. Source: tradingster.com
The current level of net long positions is lower than the level observed at the beginning of this year. Thus, we are observing a price divergence that was at higher levels. It can be concluded that despite the price increase, there are fewer buyers of USD contracts than before. As a result, the so-called long squeeze may appear, i.e. quick closing of long positions, which could lead to a significant reversal at USD.
We are observing progress in the trade war, where the first agreement between the US and China may appear as early as November, which would reduce concerns about the global economic slowdown. The Federal Reserve has cut interest rates for the third time in a row. Fed chairman Jerome Powell suggested that at the moment interest rates in the US will be maintained at current levels for a long time, while signaling that inflation remains subdued. This, in turn, may be a factor that causes the dollar to cease to be significantly bought by investors and, as a consequence, a more significant and long-term reversal in USD may appear soon.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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