Last Friday’s action sent flashbacks of 2022 across my screen.
It was all King Dollar last week as risk assets and bonds sold off in tandem.
But before we all get carried away talking about the next leg higher for the dollar, let’s zoom out to get a read on where the DXY truly stands…
In the middle of a short-term range.
The US Dollar Index $DXY finished last Friday, posting its best week since peaking in late September 2022.
But it’s been stuck between 105 and 101 since December:
The DXY might have gained 1.5% last week, but it’s stuck below a key retracement level. It’s a range-bound mess like much of the market despite the recent bout of strength.
Sideways is the trend.
But what is the likelihood the trend will change in the coming weeks?
Monitor the EUR/USD if you want to know if we have a potential dollar rally on our hands. I believe the euro holds the key to the next directional move for the DXY, as it’s the largest component of the index.
The 1.08 level in the EUR/USD pair marks my level. A DXY rally isn't getting far if the EUR/USD trades above there. It’s basic math.
On the flip side, a breakdown in the euro will fuel a DXY bid that could rip through the upper bounds of its six-month range. Stock market bulls hope to avoid that scenario as risk assets likely experience increased selling pressure.
But all you can do is prepare.
A break in the euro will likely be the first sign – after that, the DXY above 105.
