Dollar Index near top of bear channel

May 25, 2016

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. В 

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.

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