The Euro Has the Answer

From the Desk of Ian Culley @IanCulley

Is the dollar going to finally bounce?

As I pointed out last week, if there was ever a place or time – it's’ now! But that doesn’t mean it’ll happen…. 

One thing is certain: The markets don’t care what I think. This includes the US dollar.

But when I look at a chart of the EUR/USD, the largest component of the US Dollar Index $DXY, it’s running into a logical level of resistance.

How the euro reacts to current levels will set the tone for the dollar in the coming weeks and months.

Check out the daily chart of the EUR/USD:

First, let’s break down momentum in the lower pane.

The 14-day RSI has broken out of a bearish momentum regime, printing a bullish overbought reading last month. This indicates momentum has shifted in favor of the bulls.

But, from a near-term perspective, a bearish momentum divergence reveals waning strength.

These types of divergences have a tendency to work themselves out, as I give much more weight to divergences over longer time frames, especially weekly charts.

Nevertheless, the bulls are challenging levels with plenty of price memory. The 1.08  level marks the March pivot lows and June pivot highs from last year.

It‘s a significant level and a substantial obstacle for euro bulls. 

What does this all mean for the US dollar?

If the euro posts a decisive break above 1.08, we can forget about a DXY bounce. It’s just basic math. 

The euro holds 57.6% of the US Dollar Index weighting. And if the EUR/USD is printing fresh seven-month highs, I don’t want to bet that the British pound, the Japanese yen, and the Canadian dollar are rolling over. 

I like buying strength above 1.08, targeting 1.1450. But only if it trades above my risk level.  

On the other hand, if the EUR/USD finds resistance at 1.08 and trends lower, the question turns from what if to how high the dollar will bounce. 

The answer depends on whether the euro finds support at 1.0350. A break below this mark, and the USD likely reasserts its dominance. That would spell trouble for risk assets worldwide. 

But we’re not there yet.

For now, our level of interest coincides with the June pivot highs at approximately 1.08. I expect an overwhelming amount of supply to come in at those former highs, followed by a possible retest of 1.0350.

But I also want to be prepared to buy EUR/USD on strength if the market disregards my outlook.

Stay tuned.

Thanks for reading.

As always, let us know what you think.

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