Currencies | May 25 2016
By Fawad Razaqzada, technical analyst, FOREX.com
The relentless rise in the [US] Dollar Index (DXY) has continued today. The dollar has been boosted mainly on renewed expectations of an earlier-than-expected rate hike in the US, possibly in June as the FOMC’s last meeting minutes suggest, or more likely in July, once the UK-EU referendum is out of the way. In addition, data from the US has generally been positive of late, though we have had outliers such as the manufacturing PMI yesterday which showed activity in the sector fell to its lowest level since 2009. Today, however, sales of new US homes in April came in much stronger than expected and this provided fresh impetus for the dollar to rise against most major currencies, though not against the British pound which was the star performer as the latest polls pointed to reduced probability of a Brexit. Nevertheless, the pound on its own was not enough to halt the rally on the Dollar Index. In addition to the US currency being strong, the euro, which has the highest weight on the Dollar Index at 57.6%, continued to fall amid soft Eurozone data and continued dovish talk and action from the ECB.
The combination of these macro factors has helped to underpin the Dollar Index above major resistance levels of late, including most recently, 95.10/20. This area was tested as support over the last three days and evidently the bulls have held their ground here which is why we have seen another rally to fresh multi-week highs today.
The DXY is now approaching the resistance trend of its bearish channel around 95.80, so what happens here could be significant in terms of the dollar’s next likely move. With price action displaying rather bullish characteristics recently, a breakout appears to be the more likely outcome than a rejection, though it may initially hesitate here before potentially pushing higher. The RSI momentum indicator has already broken through its own trend line, so the Dollar Index may now follow suit. If it does break out of the bearish channel then the next stop could be at the prior resistance level of 96.40, the 200-day moving average, currently at 96.63, or the 61.8% Fibonacci retracement level at 97.22.
The dollar bears meanwhile may wish to wait for their opportunity and confirmation before stepping back in. They should look for a daily reversal candlestick pattern, especially around the levels mentioned above. That, or a potential break back below the aforementioned broken resistance range at 95.10/20. If seen, we could see a quick unwinding of the long positions, leading to a sharp move south. For this to happen though, we will either need to see some very bad US data once again or renewed dovish talk from the Fed.
Now you can follow us on Twitter: http://twitter.com/FOREXcom
Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.