Talking Points for US Dollar Technical Forecasts:
- The DXY Dollar Index has made its way into the smaller two-week trading range since February 2020
- A technical break seems inevitable, but momentum after clearance depends more on market conditions than on direction or spark
- A path of least resistance breakout for the dollar would benefit a range like EURUSD while the assumptions of a bullish dollar charge in a GBPUSD reversal
Technical forecast for the US dollar: bearish
The US dollar is ready for a technical breakout. Such a scenario naturally arouses a lot of enthusiasm, but identifying such scenarios is the least important factor in an effort to negotiate around such a scenario. Of course, leadership is also critical, but the criteria for determining a break can help account for this factor. The tracking potential is much more difficult in the equation. The market conditions that dictate the general pace of the financial system as a whole go much further in this direction, but they can be difficult to assess for many because they are usually not inherent in a single asset. With seasonality expectations corresponding to low volume and more open interest in the markets, we are swimming in conditions where it is probably difficult to establish a trend. This weighs on my assessment of the sequel. For the staging, the DXY Dollar Index is showing signs of an impending breakout. The range that the benchmark has widened over the 10 trading days up to Friday’s close is the smallest as a percentage of the spot since February 2020.
DXY Dollar index chart with 20 and 100 day moving averages (daily)
Considering the levels, the rise is defined by a descending trendline of peaks starting with the November 2020 high and continuing to a current price of 92.80 which also happens to be the congestion high of the two. last few weeks. It is not the most robust barrier, but it does carry the implications of a larger bullish effort which could register as a serious effort of very obvious trend reversals for EURUSD, GBPUSD and AUDUSD. . Keep in mind that the DXY is a trade-weighted index and most trades are placed on crosses with somewhat different technical structures. On the immediate downside, trendline support dates back to June 17e and is supported by the 20 day moving average in a 92.20 to 92.30 area. A break in that direction would be the path of least resistance. That doesn’t necessarily make it more likely, but the follow-up might be easier to favor in a bearish move if it does.
DXY Dollar Index chart with moving average over 120 periods (4 hours)
By taking a minute to look at the big picture to mark the most important milestones, the drag on succession is more easily appreciated with a monthly chart. At this scale, the bullish breakout would be the path of least resistance, but it would again be 90/89 which is the support built over the past six years and the 38.2% Fib of the range over the past 35 years.
DXY Dollar Index Chart (Monthly)
Highlighting a specific dollar cross is difficult. There are very provocative charts among the majors. EURUSD looks more appealing to me given its mirror image of DXY and should it maintain its wider range with a breakout above 1.1850 on the way to the notion of least resistance. For a pair that is best staged for the dollar defying the odds and trying to gain momentum on an uptrend, the GBPUSD breaking 1.3750 as an ascending triangle or head and shoulder neckline support is attractive, just as the AUDUSD tries to put the momentum behind its H&S break established since last month. There is a lot of fundamental baggage about these pairs, however. If I was looking for a pair that could move back into the range and still have the loaded image of the DXY itself, that would be the USDJPY. The pullback from 111.50 turned into the breakout of 2021 trendline support and now a head-and-shoulders pattern following is a picture under pressure. However, he still has to muster his conviction with a break of 109.50.
USDJPY chart with 100 day moving average, Spot-MA disparity and COT positioning (daily)
Given the speculative positioning, it looks like interest across the various dollar-backed futures contracts expects a bullish breakout to come in the coming weeks. At the end of last week, the speculative rank moved to a net long position behind the greenback for the first time in just over a year. This should not be taken as a serious conviction, however. There have been a few notable hiccups on the overall course at critical technical points for this crowd over the past few years. No one has a crystal ball, whether it is an individual or a group.
DXY Dollar Index chart overlaid with speculative net positioning on USD futures (weekly)
Chart created by John Kicklighter using CFTC TOC data