Since the start of the year, the U.S. dollar has been in a firm downtrend as the "Trump Trade" euphoria dies down and hard economic data has remained lackluster. The "bearish dollar/bullish commodities and emerging markets" mentality has become entrenched as traders expect the trend to continue. In this piece, I will show several charts that may be helpful for determining whether the dollar is headed for even more pain or is able to stage a bounce.
For much of 2015 and 2016, the U.S. Dollar Index traded in a range between the 93 support and 100 resistance. The post-U.S. presidential election breakout proved to be short-lived, and the Dollar Index has fallen back to its old support level at 93 (and even broke below it recently). The index is now at a critical juncture because how it acts at this level will determine its next major move. If the index is able to break back above 93 in a convincing manner, then it has a fighting chance of staging a bounce off of this level. If the index is not able to stage a successful breakout, however, then further weakness becomes more likely.
The commercial futures hedgers (often considered "smart money") have taken a bullish stance on the U.S. Dollar Index, which increases the chances of a bounce soon. Several rallies have occurred the last several times the commercial hedgers became bullish on the U.S. Dollar Index.
The short-term chart shows how the U.S. Dollar Index fell within a downtrend channel since February, but has recently broken out. As mentioned before, the index needs to break above 93 in a convincing manner in order to negate the recent bearish price action.
The U.S. dollar's weakness since the start of the year has corresponded with strength in the euro, which recently broke out of its two-and-a-half-year-old trading range. This breakout creates a bullish bias in the euro and a bearish bias in the dollar as long as it remains intact. If the euro manages to correct back to the 1.1500 support level and break below, that would be a bearish signal for the euro and a bullish signal for the dollar.
In a pattern similar to the dollar (but inverse), the euro has been climbing within a rising channel that it recently broke down from. As mentioned before, if the euro were to break below the 1.1500 support level, it would be concerning for the euro bulls.
For now, traders should see if the U.S. Dollar Index is able to regain the 93 resistance level or if it fails to do so. Traders should also watch if the euro tries to re-test the 1.1400 to 1.1500 zone and how it acts if it does.
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(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)
