The dollar fell sharply last week after the Fed’s FOMC meeting did not offer much clues for the markets on the prospects of rate hikes. While the words “near term economic risks have diminished” did offer some fodder for the bulls, Friday’s GDP report quashed any hopes for a rate hike in September. The dollar fell sharply following the GDP report, including the BoJ’s policy action earlier in the day. EURUSD rose over 1% on the day.
The US dollar index fell to 95.50 support level, but from here on, price can be expected to post a new leg in the rally.
The first chart below shows the long term view on the US dollar index. The falling median line (Red/Thick line) shows the dollar index falling within the downtrend and touched a low at 92. From there on, the dollar index rallies back to the resistance level at 95.50 – 95.50. After two failed attempts, the dollar index finally broke out from this resistance to rise to a new local high of 97.50. Here, we noticed a hidden bearish divergence on the Stochastics which resulted in prices correcting lower. On Friday, the dollar index close at 95.50, right near what was previously a resistance level that broke. Testing support at this level is key as it could now put focus in the US dollar to the upside.
What we look for is a potential reversal near 95.50 – 95.00 support level.
In the next chart, we can see that the price evolution from the 92.0 low to the resistance at 95.50 – 95.0 has led to an ascending triangle that was formed. If the current test of support near 95.50 – 95.00 holds, we can expect the US dollar index to rally towards 99.00 – 98.50, which is a strong resistance level.
This bullish view on the US dollar will be invalidated if we see a close below 95.50 and a potential breakdown from the rising trend line.
What does a bullish US dollar index mean?
A bullish US dollar index, translates to the fact that last week’s strong declines in the USD crosses are likely to be short lived. Any new dollar short positions will come under risk of a strong pullback or a reversal. For traders who don’t have any exposure to the US dollar currently could look towards building short positions in EURUSD, NZDUSD, AUDUSD, while looking for long positions in USDCAD, USDCHF and USDJPY.