As one month ends, so another starts, and in particular it’s the traditional Labor Day celebration tomorrow in the US which marks the end of summer, and a return to work for the markets, with a consequent pick up in momentum and activity. So, let’s start the new month with a look at the US dollar index for some medium term clues as to the likely direction for the currency of first reserve.
August closed with the US dollar in bullish tone, driven higher by geo political events in Syria, and a possible military intervention. The vote by the UK government not to endorse any action came as a major blow to the Obama administration, which has now signaled a ‘go it alone’ policy in the region. In addition the US has also signaled that President Obama will go to Congress, and both these events have now taken some of the heat out of this potentially volatile situation for the markets. Friday’s price action on the daily chart was typical, with the index closing with a long legged doji candle – a clear sign of market indecision, following two days of bullish moment as the index moved from the 10, 700 region to close at 10,797 on Friday evening.
From a technical perspective the recovery in US dollar positive sentiment was largely based on a platform of support in the 10,650, ( the red dotted line) which held firm, before providing a springboard for a move higher, following the bearish tone for much of August. The next level of potential resistance is now clearly defined ahead in the 10,900 area ( the yellow dotted line) which saw the index reverse lower from this level in May and early August. Between these two levels, we have the volume at price histogram which clearly denotes the depth of congestion in this region, and perhaps more importantly the extent between 10,700 and 10,800 with two extremely high volume bars. Price action in the next few days will therefore be critical for the longer term. If the index breaks and holds above the 10,800 level, then we can expect to see further upside momentum and a possible test of the 10,900 area in due course. However, any failure here is likely to signal a move lower and test of the strong support now in place at the 10,650 area.
Moving to the weekly chart gives us a clearer perspective on the longer term for the US dollar, and in addition the two levels of support and resistance outlined above. What is perhaps more evident from this time-frame is the congestion phase that is now in place, and it is also interesting to note the two failed breakouts in June and July – both promised much, but were promptly reversed the following week. What is clear however, is that to the downside, there is a very strong platform of support in place in the 10,550 area, and even if we do see any short-term reaction lower, longer term the US dollar remains looking positive.
By Anna Coulling