Dollar Hits Two-Year High Then Stumbles

The DXY demonstrated levels above 98.35 on Wednesday, taking the Dollar to the highest trading level since May 2017. However, this prompted a frantic two-day sell-off to occur which subsequently raised the risk of a false break reversal.

The Dollar has been on a roller coaster ride of a week this week, which saw the first half of the five-day stretch on a steady incline towards a three-month range high. Results reached their peak on Wednesday which saw the earnings breakout traders had been waiting for. This resulted in the best performing month for the Dollar since 2016 (the post-election rally); demonstrating a similar combination of pace and technical achievement. Ramping up speculation that bulls are wrestling back for control, following what has been an extremely uncertain period for the Dollar. However, the sharp reversal that followed on Thursday and Friday this week has put a serious dent into the technical charge, signifying that this most recent run may not result in a lasting drive. The pullback experienced at the back end of this week should encourage traders to look more critically into the technical analysis, to investigate how stretched the market has been proceeding to the weeks of progress, how irregular the chart behaviour has been and subsequently how difficult this makes fight for a motivated trend line.

CHART OF DXY DOLLAR INDEX WITH ‘TAILS’ AND 20-WEEK ATR (WEEKLY)

The popular monthly chart above provides a full scope of the market’s restraint over the past few months and offers a higher time-frame of Dollar activity. This style of chart overview offers traders the best view of the recent bullish performance in relation to the high’s experienced back in 2016, however it doesn’t offer the significant detail needed in order for a deepened technical analysis to occur. The detail which inspires or supports a trend-line. So where can this detail be found and what do traders need to be looking for?

If we are to assess the technical potency of the Greenback it is important to view the key fundamental undercurrents to the charts. Including the current forces that are vying for the Dollar’s attention. The bullish charge for the Dollar last Wednesday was as a result of the FOMC rate decision. Another factor to observe throughout the week ahead is that the world’s most liquid currency certainly holds place in the rank for security, when financial stability starts to breakdown. Therefore, the correlation between the DXY and the EUR/USD, GBP/USD and USD/JPY needs to be investigated. The chart below demonstrates the implied volatility readings from the CME incorporating all factors, which is generally positive for the week ahead. However, despite this positive indication moving forward a true bullish trend returning is unlikely at this stage.

CHART OF DXY DOLLAR INDEX AND ‘FX’ VOLATILITY INDEX (DAILY)

Looking at the Greenback’s positioning moving forward following its tenacious climb, it is to be suggested that the market is pushing back against the bullish picture. Traders will need to keep a close eye on significant external political factors over the up-and-coming weeks and the performance of the USD currency pairs, in order to analyse the intricate technical picture for the Dollar moving forward. Could the analytics signify a reversal for the Dollar or have we simply hit pause on the high-ride?

At the time of writing the EUR/USD was at $1.11076, GBP/USD $1.21671 and USD/JPY was performing at $106.624.


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