The markets’ focus this week will be on US Non-Farm Employment change which will be reported on Friday. Expectation is that the US economy has added 229 000 new jobs while the previous month’s figure was 248 000 which beat analysts expectations. Traders will get a preview on employment data tomorrow as private Automatic Data Processing Inc. publishes their estimation of the Non-Farm figures. The ADP figure doesn’t always track well with the official number, but it is still an event that markets pay attention to. It is expected that ADP will report 214 000 new jobs outside the farming industry and should there be a significant deviation from the expected number of jobs, there would be stronger market reaction in the dollar pairs.
DXY Weekly:
The US Dollar Index (DXY) is trending higher as slowdown in global economic activity once again means that the US economy is the cleanest dirty shirt in the laundry basket. There is an element of flight to quality combined with the fact that the Federal Reserve is expected to raise rates sooner than other central banks in major economies. The Index has reached a four year high which has brought it to a weekly pivot from June 2010 (red lines). This has caused the sideways move we have seen lately. Support can be found at the latest weekly high (blue line) and the weekly target is the high of the weekly pivot (from June 2010). This coincides with the 4.250 Fibonacci extension target calculated from the price action from May to June this year.
DXY 240 min
DXY 240 min:
The current sideways move in the 4h chart is due to a Fibonacci extension cluster (navy lines in the chart) and the historical weekly pivot low creating a resistance. Index is getting close to the upper end of the trend channel and the Money Flow Index (MFI) is overbought, but that is typical in an uptrend. I look for a continuation of the trend, but would not rule out a short lived correction to the nearest 4h support. Should the index have a correction I would look to trade against the area of the recent gap and the previous high. I believe this area will attract dollar buyers if it is reached. The Fibonacci extension level could well be the first target as it coincides with trend channel top. The numbers 1 to 3 in the chart help the readers to see which points I have used in drawing the Fibonacci extension target.
DXY 60 min
DXY 60 min:
The intraday price action is at the time of writing taking place at an intraday support zone created by a previous low and the pivot high before that (blue lines). My experience is that support levels are not exact levels but rather areas or zones. That is why I don’t focus on one single point value as a support but rather draw couple of levels and have zone between them. The Index is at lower Bollinger Bands that coincide with this support. While MFI is oversold in this timeframe, this support level could provide an opportunity for dollar longs. If the level breaks look for trades at the support at 240 min. gap.
DXY and USDJPY, 240 min.
Conclusion
The US Dollar Index is at a historical resistance (weekly pivot from 2010) that coincides with a Fibonacci extension cluster calculated from pivots in a 4 hour chart. I expect the trend to continue with the first target in the region of 1.618 Fibonacci extension and the channel top. If the current support in 1h chart does not hold then I would look for long USD trades (i.e. short EUR, AUD or JPY for instance) close at the area of 4h gap and previous weekly high. However, we have to remember that all currency pairs are individual markets with their own characteristics. Therefore, pay attention to potential support and resistance areas in currency pairs you intend to trade. In other words, traders should do their own analysis as well reading mine. By doing analysis on DXY my intention is to provide traders with a framework by which the moves in USD pairs can be better understood. As can be seen from the chart above the price action in DXY future helps in understanding what is likely to happen for instance in USDJPY. In order to increase the probabilities of winning, it is advisable to trade the USD against weak currencies such as AUD, JPY and EUR and not the likes of GBP. As we have already seen GBPUSD has relative strength while the USD has been moving higher.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Janne Muta
Chief Market Analyst
HotForex