But let’s put the current action into perspective before we get ahead of ourselves.
Remember, a single session doesn’t constitute a trend.
But it could mark a critical turning point…
The US Dollar Index $DXY violated a year-to-date downtrend line last week, breaking above its June pivot high:
And it did so while posting its first overbought reading (14-day RSI above 70) since its peak last fall.
That’s an impressive feat and a clear point for dollar bulls!
Yet I can’t ignore the oversold momentum reading (14-day RSI below 30) that accompanied last month’s failed breakdown.
The bearish momentum print served as confirmation at the time of the breakdown. But further weakness never materialized.
Instead, that bearish momentum reading preceded an explosive bullish thrust.
Check out the number of consecutive up-weeks in the lower pane of the DXY chart since the 14-day RSI hit oversold:
The DXY has finished in the green for six straight weeks and counting.
I know it’s only Tuesday morning, but it’s not looking good for a seventh week of positive returns for King Dollar.
Nevertheless, readings of similar magnitude have led to further strength over the past decade. These outliers also tend to come in pairs – initial and secondary thrusts (highlighted in green).
Are we witnessing the early stages of another sustained dollar rally? It’s possible.
I’m tracking the June pivot highs at approximately 1.0350 in the near term. As long as it holds above those former highs, it’s game on for the dollar bulls.
On the flip side, a break below that level indicates a cooling advance as the DXY likely slips beneath a year-to-date downtrend line.
If it does, I imagine the euro, pound, and yen are catching a bid, applying additional downward pressure on the dollar index.
The euro isn’t painting a bullish picture, though:
EUR/USD has fallen below 1.08, resolving lower from an upward-sloping channel. But it has yet to hit oversold on the 14-day RSI.
Price quickly reversed higher on the previous two occasions momentum fell to these levels.
Will the EUR/USD do the same this time around? Perhaps.
We’ll have to wait and see if last week’s breakdown holds into Friday’s close.
The USD/JPY, on the other hand, continues to climb onward and upward, kicking off the week with fresh year-to-date highs:
The yen trade is as straightforward as it comes. I like the USD/JPY long toward 152, but only if it trades above 145. It’s that simple.
And it’s another point for the dollar bulls – as is the structural trend for the pound.
The British pound has come a long way since retesting its all-time lows last year.
Yet it’s still stuck beneath a decade-long downtrend line:
The structural downtrend remains intact as long as the GBP/USD trades below 1.3150 and the long-term trendline.
