Whatever the market we trade, and whether we are speculators, investors, swing or trend traders, there is one chart which always holds the key, and that’s the US dollar index. Whether we like it or not, all markets are ultimately US dollar centric, and if we can forecast the direction for the currency of first reserve, then the rest is plain sailing! However, in these times of manipulation and currency devaluation, coupled with distorted markets bloated by endless quantitative easing, this is easier said than done!
Indeed, the US dollar index is a case in point. After all, does this chart truly reflect the market of today, given the European weighting that underpins the index. This alone represents over 70% of the basket, and with the Yen at a paltry 13.6%, and the Australian dollar nowhere, in my humble opinion, hardly representative of the broad markets. There are other indices of course, and a couple I prefer to use myself, purely because of the weighting, which I believe no longer represents the balance of power in the currency markets. Thirty years ago, perhaps this was the case, but in today’s market, it’s most certainly due for an overhaul.
Despite this, the ‘old’ dollar index remains on most traders radar, so let’s take a look at the daily chart, and what’s immediately clear is the level of resistance now building in the 83.50 area, which has been tested on three occasions in both March and April, so a nice triple top now in place. All failed at this level, and following last week’s price action, we now appear to have a secondary level of resistance building in the 82.40 region. The hammer of last week, was duly validated with the wide spread up candle, but this was followed with a long legged doji candle, a classic sign of market indecision. Two day later, this weakness was confirmed with a hanging man, with yesterday’s price action adding further downwards momentum to the dollar. With a secondary platform of support now being built in the 81.80 area, any break below this region could see the index move back to test the more developed platform of potential support in the 81.27 area, and from there back to 81.00 which should hold.
From a fundamental perspective there is little in the way of major US announcements, with only weekly unemployment claims today, ahead of the G7 meetings tomorrow, so we could see a quiet end to the week for the US dollar.
Short term, the technical picture remains bearish, and for any continuation of the recent bullish trend for the dollar, 83.50 is now the key level, assuming of course you trust the underlying basket!
By Anna Coulling