24 August, 2016
Yesterday we looked at a long-term chart of the EUR/USD and highlighted the fact that the Fibre was testing a key resistance zone in the 1.1320-65 area (old support, underside of a broken bullish trend and 61.8% Fibonacci level). For more details, click HERE. Today, we are looking at the technical outlook for the Dollar Index, which is a measure of the buck relative to a basket of foreign currencies.
The Dollar Index (DXY) basically moves inversely to the EUR/USD, as the euro has a weighting of more than 50% on the index. So, it is a very important market to watch for the FX traders, especially for the EUR/USD (57.6% weighting), followed by the USD/JPY (13.6%), GBP/USD (11.9%) and then the USD/CAD (9.1%).
Now, the DXY has been stuck in a sideways range for one and a half years. In range-bound market conditions, I have found that harmonic price patterns tend to work better than in trending markets – I am talking about the Gartleys, Butterflies, Bats and AB=CDs etc.
As you can see on the chart, there is a potential AB=CD pattern forming on the DXY currently, with the 61.8% Fibonacci retracement and an old resistance level providing support for point C to be potentially formed at around 94.10. If the rally from point A to B is anything to go by, then the DXY could find itself near 100 once again in the coming months.
Note that the prior rally had stalled around the 61.8% Fibonacci retracement level against the prior high (point X), where there was also a bearish trend line in place. Now, the selling pressure could end as price tests the 61.8% Fibonacci level against the prior low (point A), where there is also a bullish trend line in place. Noticed the price harmony now?
It must be pointed out though that this harmonic price pattern is in the early stages of development which may never come to fruition. Nevertheless, it has provided a small bounce for the dollar for the time being. The buck’s next move can become a little more predictable depending on what the DXY does next.
The bulls will need to chop some wood if the DXY is to get anywhere near 100 again. Resistance could be provided, among other things, by the prior support levels at 95.00, 95.25 and 96.50, or the 50- and 200-day simple moving averages at 95.72 and 96.42, respectively.
However, if the buyers fail to defend their ground at 94.10 then we may see a potential drop towards the lower band of the 1.5-year range at around the 91/92 area next, with some intermediate reference points to watch for signs of support at 93.50 and 93.10.
Please note that my fundamental outlook on the dollar is bullish because the Fed remains the only major hawkish central bank out there while the rest are pretty much all dovish. So my technical analysis tend to have a bullish bias when it comes to the US currency.
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