Dollar Index Near Top of Bear Channel
The relentless rise in the Dollar Index has continued today. The dollar
has been boosted mainly on renewed expectations of an
earlier-than-expected rate hike in the US, possibly in June as the
FOMC’s last meeting minutes suggest, or more likely in July, once the
UK-EU referendum is out of the way. In addition, data from the US has
generally been positive of late, though we have had outliers such as the
manufacturing PMI yesterday which showed activity in the sector fell to
its lowest level since 2009. Today, however, sales of new US homes in
April came in much stronger than expected and this provided fresh
impetus for the dollar to rise against most major currencies, though not
against the British pound which was the star performer as the latest
polls pointed to reduced probability of a Brexit. Nevertheless, the
pound on its own was not enough to halt the rally on the Dollar Index.
In addition to the US currency being strong, the euro, which has the
highest weight on the Dollar Index at 57.6%, continued to fall amid soft
Eurozone data and continued dovish talk and action from the ECB.
The combination of these macro factors has helped to underpin the Dollar
Index above major resistance levels of late, including most recently,
95.10/20. This area was tested as support over the last three days and
evidently the bulls have held their ground here which is why we have
seen another rally to fresh multi-week highs today.
The DXY is now approaching the resistance trend of its bearish channel
around 95.80, so what happens here could be significant in terms of the
dollar’s next likely move. With price action displaying rather bullish
characteristics recently, a breakout appears to be the more likely
outcome than a rejection, though it may initially hesitate here before
potentially pushing higher. The RSI momentum indicator has already
broken through its own trend line, so the Dollar Index may now follow
suit. If it does break out of the bearish channel then the next stop
could be at the prior resistance level of 96.40, the 200-day moving
average, currently at 96.63, or the 61.8% Fibonacci retracement level at
97.22.
The dollar bears meanwhile may wish to wait for their opportunity and
confirmation before stepping back in. They should look for a daily
reversal candlestick pattern, especially around the levels mentioned
above. That, or a potential break back below the aforementioned broken
resistance range at 95.10/20. If seen, we could see a quick unwinding of
the long positions, leading to a sharp move south. For this to happen
though, we will either need to see some very bad US data once again or
renewed dovish talk from the Fed.
