Currency Pair of the Week: DXY

DXY isn’t a currency pair, however it is an important gauge of the US Dollar

FOREX 5

The US Dollar Index (DXY) isn’t a currency pair, per se, however it is an important gauge of the strength of the overall US Dollar and therefore, reflects how its currency counterparts may act.  Recall that in response to the coronavirus pandemic, the US Federal Reserve has been flooding the market with US Dollars, therefore helping to push the value lower (higher supply with no change in demand equals lower price).  Indeed, the price of DXY has moved lower over the last 4 weeks.

The DXY is currently at an inflection point between a downward sloping trendline from May 15th and a long-term upward rising trendline from mid-February 2018.  Also, within a stone-throw of this area is the 200 Week Moving Average (not shown), which comes across at 96.45.  If DXY moves the 200 Week Moving Average and the downward sloping trendline, it would be bullish.  However, if the index breaks below the June 10th lows and the upward sloping trendline near 95.72, that would be bearish.   In addition, the correlation coefficient between DXY and SPX 500 is creeping into early June territory, currently at -.92.  In June, it reached a low of -.97.  As a guide, a reading of -1.00 means that the 2 assets are perfectly negatively correlated.  So, if SPX 500 moves higher, DXY would move lower on a 1 for 1 basis.

Source:  Tradingview, FOREX.com

Given that the DXY and SPX 500 are so correlated, it would help to look at SPX as well for some guidance on the DXY.  The SPX 500 is currently trading at significant horizontal resistance above the June 9th highs and previous resistance from January and February of this year. It recently broke out of a triangle consolidation and is drifting higher.  However, the RSI is diverging with price, which could mean the equity index may pull back.  If SPX 500 continues to push higher, that would push DXY lower.  If SPX 500 reverses and pulls back near the 200 Day Moving Average near 3040, DXY should move higher.

Source:  Tradingview, FOREX.com

Now that we have shown the current extreme negative correlation between the DXY and the SPX 500, the opposite should be true for the US Dollar denominated currency pairs.  For example, EUR/USD is moving higher, along with SPX 500 (as the US Dollar is moving lower).  In early July, the pair broke out of a flag formation and is pushing higher towards the target near 1.1700.  The correlation coefficient with the SPX 500 is +.88 (POSITIVE!).  Therefore, if SPX 500 is moving higher, so should the EUR/USD and the DXY will move lower. 

Source:  Tradingview, FOREX.com

The DXY has closed lower the last 4 weeks.  If one is looking for further direction of the US Dollar, look no further than SPX 500, as the 2 assets are highly negatively correlated.  As long as the correlation remains high, this should help to provide guidance to US dollar currency pairs as well.


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