Technically the USD looks very overbought. I know it. You know it. Hell, your grandmother probably knows it (by suggesting you buy it). But the question you have to ask yourself, “should you short it?”

Most traders are loured in by the tendencies of being the one guy or gal who “calls the top” or can yell from the rooftops “I nailed it!” I know this since I have been there, done that. I (like many others) have tried to fade the strong US equity markets one too many times in the last 5 years and have come up empty handed (or pocketed…however you want to look at it!).

The USD in this situation is no different, in my opinion. Technically, we are nudged up against a trend line that has confined us for the last 10 years! See weekly chart below:

But before you short the USD, take into account a few things technically:

Daily chart we just broke out of a bull flag (continuation pattern and now target 86.00:

And, if you take a “longer term look of the weekly chart, RSI wise, the RSI has seen more overbought conditions in the past:

When you take a step back and ask “why” the USD is moving against some of the major currencies counter parts, the answer now is a little clearer than it was a couple months back. The single most powerful driver in the Forex markets are rates (and rate expectations). Today, the FOMC is talking about “normalizing” rates and ending many years of quantitative easing, where the ECB and BOJ are adding more liquidity to the markets. If you take a look at the BOE and what is happening in Scotland this week, the BOE may end up with an ultra loose monetary policy for quite some time as well if Scotland decides to go independent, which will only fuel more fire to the USD rally unfolding before your eyes. Bottom line, rate expectation for the US are moving up. In a ZIRP world, the other 3 central banks are…well….moving sideways at or below ZIRP.

Can you make money fading the USD’s strength? Yes you can, but be very careful, this move is strong may end up being more powerful than you can imagine. Keep your stops tight, manage your risk appropriately, so you can trade another day. If this trend really explodes to the upside, the last thing you will want is to be on the other side of the USD when (or if) it moves a quick 10 cents on the USD index.

Blake Morrow

Chief Currency Strategist, Wizetrade

Disclaimer: I am long the USD and have been long the USD against a basket of currencies for weeks.