Can King Dollar Reclaim Its Throne?

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Last week, we asked the question...is it time for a dollar bounce?

And the market quickly answered with a resounding, YES!

We’ve highlighted several currency pairs challenging crucial levels of support and resistance. Last week, we saw the USD take control at those key levels. 

Both the EUR/USD and GBP/USD turned away from critical areas of former support turned resistance. The USD/CAD moved sharply higher from a major area of support. The AUD/USD broke back below a key retracement level after consolidating for the first half of the year. And the NZD/USD retreated from an area of overwhelming overhead supply.

King dollar is definitely back in the driver’s seat from a tactical viewpoint as we’ve seen a significant shift in favor of USD over the near term. But even the intermediate and long-term trends for most major FX pairs have flipped in the direction of the Dollar over the past month or so. 

We’re watching closely to see if these new changes in trend are the real deal.

As such, we’re zooming in and scrutinizing each new piece of incoming data in order to gauge whether the recent bounce in the USD is likely to bleed through to longer timeframes.

With that as our backdrop, let’s jump into it and identify some key tactical levels in the Dollar Index $DXY for the weeks ahead.

Here’s a daily chart of the Dollar Index:

The positive divergence in momentum gave us a heads up that the decline in DXY was due for a pause as we headed into January. In Q1, we saw momentum transition back into a bullish regime as the RSI-14 hit overbought twice in March, and then avoided oversold conditions during the April-May selloff that ensued. This behavior from a momentum standpoint suggests we are likely in the early stages of a trend reversal.  

As for price, the Dollar Index has developed a potential double bottom formation with a breakout level near the March highs of ~93.25. The measured move from this bullish reversal pattern takes us back to the key retracement level near 97.70.

A move of that magnitude would put a dent in our structural outlook, as we still contend that a possible double top is playing out on longer timeframes. 

Regardless, we have to be prepared for whatever the market throws at us.

And right now, the two key levels of potential resistance for the DXY are the 93.25 level mentioned above, and the retracement level near 94.50. 

These are the levels we need to keep our eyes on in the coming weeks as we continue to see evidence that this USD rally could pick up steam. If and when DXY reclaims these key levels, we'll have to reevaluate our structural view. 

We will highlight multiple tactical trade setups in USD crosses as vehicles to express our short-term bullish thesis later in the week. Stay tuned!

And be sure to download this week’s Currency Report!

Thanks for reading. As always, let us know what you think.

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