From the Desk of Ian Culley @IanCulley
The US dollar Index $DXY is running into support at a shelf of former highs.
How it reacts will influence how stocks fare heading into the year-end.
Let’s check out three charts and three levels to monitor.
Before we dive in, here’s a chart of the US Dollar Index futures retesting the breakout level of a massive seven-year base:
This is a logical level for the dollar’s steep decline to pause. What follows could mean the difference between marking the end of another bear market rally or ushering in a more significant advance.
Yes, we think the dollar’s reaction here is critical!
Here are the three most important charts aside from the DXY.
First up is the EUR/USD:
The euro reclaimed a key level of former support last week. That’s the level you want to monitor – 1.0350.
As long as the euro holds above that level, the US dollar doesn’t get far.
On the flip side, dollar bulls take control if the EUR/USD undercuts its shelf of former lows.
Next is the USD/JPY:
Our level for the dollar-yen is the July pivot high at approximately 139. Price found brief support at that level last month before completing a downside resolution.
The risks remain lower for the USD/JPY at current levels. But our tactical outlook flips higher on a close back above the former July highs.
While those former highs lack the same structural significance highlighted in the euro, how price responds to this level carries weight regarding the near-term direction of the dollar.
Last but not least is the GBP/USD:
The pound presents a story similar to the euro. Multi-year support at 1.1950 needs to hold. A break below there gets messy, favoring a buoyant US dollar.
It’s that simple.
The DXY isn’t a large index. It’s only comprised of six currencies, and the three outlined above account for 83% of the weighting. Where the euro, yen, and pound lead, the US Dollar Index follows.
If the euro and pound slip back below their respective multi-year support levels and the USD/JPY pair reclaims 139, the DXY isn’t just finding support – it’s bouncing!
Stock market bears will dominate in that environment. Recent breakouts likely fail. And buying opportunities will dry up.
On the other hand, if the principle of polarity kicks in for these key dollar pairs, the DXY probably continues to slide. Or perhaps it enters a trendless range.
Regardless, equities worldwide benefit from both scenarios as dollar headwinds dissipate.
Any expectations of a potential tailwind or boost for risk assets depend on whether the above currencies experience a sustained rally.
Stay tuned!
Thanks for reading.
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Allstarcharts Team
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