The US Dollar (DXY) has been under significant pressure the last week, and we may have just tested a critical support for long term traders who are looking for longs.

Before we take a look at the chart, let’s talk about the reasons (the market believes) the DXY has pulled back:

• Recent market turmoil has traders and investors thinking the Fed won’t raise rates in September, and some don’t think rates will go up until next year. Barclays just revised its outlook from September till 2016 due to volatility in the market. Although I think the market is having a mini tantrum (think taper tantrum in May 2013 when the Fed announced it would taper asset purchases and the markets fell) but I am not sure it is a done deal that the Fed will cater to the needs of the market at this time. Keep in mind this is the Yellen Fed, not the Bernanke Fed. I believe the Bernanke Fed was a little more sensitive to market forces. The Jury is still out with Janet Yellen at the helm.

• Traders and Investors note that the “carry trade” unwind in the EUR denominated trades are being unwound as stocks and commodities fall. Correct me if I am wrong, China’s rates are just over 4%, Australia at 2%, New Zealand at 3% and Mexico at 3%. Tukey is at 7.5% which could make sense for a “carry” trade. In a world where most central banks are near ZIRP, I can’t see this being a huge catalyst and not very attractive to hold carry trades with such small rate differentials and accounting the volatility associated with holding a trade. Especially with some of the said currencies under performance in recent years. I think the next reason could be the bigger catalyst.

• The market has been aggressively long the USD this last year. But as Forex Live reported last week, EUR shorts continued to trim positions (previous to the recent EUR surge). Is there still lopsided positioning long the US Dollar at this point? Perhaps, but I would assume after the move in the EUR/USD this last week or so, it is more “neutralized” as US Dollar longs got liquidated.Since the DXY is weighted 56.7% EUR, this may be a key point.

How much more US Dollar weakness will there be?

Based on this long term chart of the DXY, I think we are closing in on some serious support.

DXY is testing the breakout points from 2004-5, and also still is in a bull flag formation. We just tested this week the 38.2% Fibonacci retracement level near 92.50.

Personally, I am now on the lookout for US Dollar longs.

Blake Morrow

Chief Currency Strategist, Wizetrade