The US Dollar Index $DXY is violating its year-to-date trendline.
Is this it? Will the dollar finally follow the breakdowns in crude oil and interest rates?
The forex markets say, “Not so fast…”
Following yesterday’s breakout, the British pound is slipping back into the box as the greenback digs in its heels:
Fading the failed GBP/USD breakout earlier this spring proved rewarding. If you’re feeling spicy, you can take another shot at a mean reversion toward 1.25 – but only if the pound is trading below 1.2750.
On the flip side, I like buying the GBP/USD if it reclaims 1.2775 with a target of 1.3150. This trade will only work if DXY is trending lower.
The euro is also running into resistance – down 40 pips this morning:
Since the euro constitutes more than half of the index, DXY isn’t breaking down if the EUR/USD pair is tracking lower.
The 1.0950 level coincides with the euro's March pivot high and the right-shoulder top of a potential failed head and shoulders. A daily close above those former highs confirms the failed bearish pattern, setting our next upside objective at 1.1225.
Meanwhile, the carry trade is unwinding.
The dollar-yen was down more than 125 pips in early trading after running into resistance at approximately 158:
A swift drop in the USD/JPY pair often accompanies risk aversion as investors flip the book long yen (the lower-yielding safe haven).
The same applies to the US dollar-Mexican peso pair (but with the USD acting as the safe haven instead of the yen):
Yesterday, the dollar-peso registered its largest one-day rate of change since June 2020.
Interestingly, the VIX is playing it cool:
It’s not what I would expect. But it makes sense given the positive correlation between the VIX and USD/MXN began decoupling earlier this spring.
It all comes down to the euro and pound. If these two currencies can stick to their upside resolutions, this could be it. Plus, the carry trade is unwinding amid healthy risk-seeking behavior—two reasons not to buy dollars.
