From the Desk of Ian Culley @IanCulley
The dollar experienced significant volatility last week, posting its largest single-day loss since 2015.
As far as we’re concerned, the dollar is done. The weight of the evidence strongly suggests its best days are behind it. But that doesn’t mean it’s straight down from here for the US Dollar Index $DXY.
Instead, we expect plenty more volatility in the coming weeks and months. And when we look beneath the surface of the DXY, we’re at a logical level for the dollar to catch a breather.
Here’s a rundown of the individual pairs that form the US dollar index.
EUR/USD (57.6% of DXY) – Initial Target Hit
The EUR/USD was the first vehicle we used to short the dollar. The entry wasn’t the cleanest. But the breakout eventually stuck, and price hit our target.
It’s no coincidence that our initial upside objective is marked by a shelf of former lows going back to 2014.
If you’ve spent any time trading the euro, you know it loves to back and fill. That’s the euro’s move. It’s how it likes to digest supply and absorb demand.
So we need to give it space to do its thing.
USD/JPY (13.6% of DXY) – July Highs in Focus
Last Thursday, the USD/JPY fell almost 500 pips! We pay close attention to extreme directional moves like these, as they often mark the beginning or end of major trends.
Thursday’s breakdown also violated a Year-to-date trendline, while the 14-day RSI reached oversold conditions for the first time since Nov. 2020.
This was enough evidence for our bias to turn lower for the USD/JPY.
Despite the dollar-yen dropping like it’s hot, support continues to hold at the former July high ~139.00.
GBP/USD (11.9% of DXY) – Revisiting the Brexit Lows From Beneath
The GBP/USD has had more bounce to the ounce during the past two months than any other dollar pair. In late September, it retested its all-time lows of 1.0345.
Today, it’s challenging its former Brexit lows from 2016. That’s impressive! But the shelf of former lows at 1.1950 defines a significant amount of overhead supply.
It would make sense for the pound to digest its gains below this key level of former support.
USD/CAD (9.1% of DXY) – Initial Objective Within Reach
A downside momentum thrust kicked off the breakdown in the USD/CAD as prices declined last week.
We’re still short this pair, but it’s not far from triggering an exit at our target of 1.3050.
This level represents an overwhelming amount of price memory, highlighted by the multiple touches from May to Sept of this year.
It won’t surprise us if dollar bulls support a bid at the shelf of former highs. Regardless, it marks a potential support level. So don’t be surprised if the USD/CAD breakdown stalls ~1.0350.
USD/SEK (4.2% of DXY) – Big Level for the Krona
After breaking to new all-time highs in September, the USD/SEK is pulling back toward its 2020 highs. This is a logical level of potential support.
Notice the last time the USD/SEK broke above 10.38 in 2001 it formed a near-term top, finding support at the same level marked by the 2020 highs.
That doesn’t mean we’ll witness the same topping formation twenty years later. But it does indicate price memory we need to respect and a potential hurdle for US dollar bears.
USD/CHF (3.6% of DXY) – Polarity 101
You hear us talk about the principle of polarity all the time. It’s what we’ve been highlighting this entire post – former support becomes resistance and vice versa.
Edwards and Magee devote an entire chapter to the topic in their classic “Technical Analysis of Stock Trends.”
For the USD/CHF, 93.75 is the level of interest.
Investors and traders have tapped around that level for almost two years.
First, it represented resistance leading into the April breakout earlier in the year. Then, it became support in August as bulls stepped in and drove prices higher.
Now, the USD/CHF is falling back toward the .9375 level today. We couldn’t think of a better place for the current decline to pause.
There you have it!
All the individual dollar pairs that comprise the DXY index are running into logical levels where they should digest their recent moves.
It’s not just the pound or euro. It’s the yen, Canadian dollar, krona, and Swiss franc, too!
This doesn’t change our bearish outlook for the US dollar – nor the fact we want to continue to look for stocks to buy, not sell.
Instead, think of this as a simple reminder that price doesn’t move in a straight line. When we look beneath the surface of the dollar index, the data suggests sideways action in the near term.
Stay tuned!
Thanks for reading.
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Allstarcharts Team
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