Stanley Druckenmiller is betting against the US dollar – should you?

Stanley Druckenmiller is a legendary investor from the United States. He broke the Bank of England with George Soros in 1992 with a huge bet against the British pound.

Fast forward to the present day, and Druckenmiller is again making a high-conviction trade. This time, against the US dollar.

In a story published by Financial Times this week, Druckenmiller said that missing the US dollar’s rally in 2022 was one of the biggest mistakes of his career.

Indeed, a quick comparison of the Fed rate hiking cycles since 1972 shows that the current tightening cycle is one of the most aggressive in history. Yet, the dollar has given back a big chunk of its gains recently, as shown by the dollar index chart presented in the second part of this article.

DXY is in the process of completing a head and shoulders pattern

One interesting chart that somehow supports Druckenmiller’s thesis is the dollar index (DXY). A reversal pattern is in the making – a head and shoulders.

DXY chart by TradingView

Such a pattern forms at the top of bullish trends, and its biggest disadvantage is that it is time-consuming. By the end of the pattern, everyone sees it, and so it is often invalidated by future price action

In any case, the pattern’s measured move points to a decline into the 90 area – well below the current levels. A move like this implies a break below the pivotal 100 level, which acts as a line in the sand for bullish or bearish dollar trends.

But Druckenmiller does not cite technical analysis for its trade against the dollar. Instead, he believes that the Fed will deliver more rate hikes in the near future than there are priced in, a move that should weigh on the US dollar.

Summing up, Druckenmiller’s bet against the dollar is due to Fed cutting rates in response to an economic downturn. If that is the case, then one should not be surprised to see the DXY reaching the head and shoulders’ measured move once dropping below the pivotal 100 level.