Other major global currencies are regaining lost ground following a year dominated by dollar strength. It shows in the US Dollar Index $DXY as it continues to slide back within its prior multi-year range.
Lower lows for the DXY will not instill confidence in dollar bulls. Meanwhile, savvy investors should take its performance as a signal to buy other currencies.
Here are two of my favorite setups from the forex markets…
Check out the GBP/USD pair on the verge of completing a multi-month reversal formation:
This chart has the hallmarks of a classic inverted head and shoulders with a neckline at 1.2425 (the Dec. 14 close). That’s our risk level.
We want to buy strength on upside resolution above that level, targeting the Dec. 2021 pivot lows at approximately 1.3150. I’ll monitor the 14-day RSI for a reading above 70 in confirmation of the advance.
A breakout for the pound sets the path of least resistance higher, representing a bullish development for the GBP/USD pair and global risk assets. It’s simple.
If the pound claws its way back against the dollar, other major currencies likely do the same.
Here’s the New Zealand dollar NZD/USD carving out a similar bottoming formation:
I actually prefer the NZD/USD over the GBP/USD chart for two reasons.
First, momentum is bullish after exceeding 70 in early December. Though the pound technically has broken out of a bearish regime, momentum has yet to break above 70.
Second, I like the abbreviated right shoulder. The stunted nature of the recent pullback indicates healthy demand.
Both are grade trades. And I highly doubt they resolve in opposite directions.
As long as the NZD/USD holds above the Dec. 13 close of .6465, I like taking a shot at the long side with a target at approximately .70.
Bottom line: Both pairs could rip much higher. But, after last year's moves, I want to take a more tactical approach. Let the dust settle.
That’s it for today -- just a couple of trade ideas.
Of course, if these trades work, I’m sure global risk assets will enjoy a weaker dollar.
