Like most indicators, extreme seasonal tendencies provide the best information. And I can’t ignore the strong positive seasonality for the US dollar as it enters its best month of the year.
Here’s a monthly performance chart for the US Dollar Index $DXY going back to 1980:
January represents the most bullish month for the US Dollar Index by a wide margin. February and March aren’t bad, either. This doesn’t mean I’m scrambling to put on long dollar trades. That’s not what seasonality is about.
Instead, it acts as a roadmap, providing the context or condition of a particular market by observing past and present behavior. It’s especially important to understand the seasonal tailwinds and headwinds for any given market at potential inflection points.
Check out the monthly DXY candlestick chart:
After peaking at a key extension level in late September, the dollar index has dropped almost 10% during the past three months. And there’s plenty of price memory around that 103 level, making it a logical spot for the DXY decline to pause.
That doesn’t mean it will.
Regardless, based on price and seasonality, it’s neither the place nor the time to press USD shorts. If anything, watch for a bounce in the coming weeks and months.
As technicians, we study historical price action. And history tells us the US dollar has a strong tendency to produce positive returns over the next few months. Don’t ask me why. I have no idea! For my purposes, it doesn’t matter.
The bottom line is a dollar rally shouldn’t surprise you, given the seasonal tailwinds and a potential polarity zone at 103.
But, if the dollar fails to post positive returns in the coming weeks and months, that’s an insight into a weakness that likely persists.
