Is this the dollar’s comeback?
Fawad Razaqzada June 9, 2016 6:00 PM
The dollar has been pounded in recent days as expectations about a July Fed rate hike receded. Today however the greenback found good support against certain currencies, especially the euro which fell across the board. Despite the delay in the potential rate rise, the Fed remains the only major central bank looking to tighten its policy. In contrast, most other central banks are still very much dovish, including the ECB, BOJ and BoE. For this reason, we remain fundamentally bullish on the US dollar. However it could still be a long time before we see a significant appreciation in the currency.
But the rally could occur at any time and we need to be alert to that possibility. In fact, the Dollar Index is in the process of forming a bullish engulfing candle on its daily chart today. This technical pattern suggests that the previous selling pressure has ended and the buyers have stepped back in. It is interesting that this rebound has occurred at around the 61.8% Fibonacci retracement level against the most recent rally off the support trend of the bear channel. When long-term trends change, a retracement to the 61.8% Fibonacci level is often seen before price stages another impulsive move. The first impulsive move occurred in early May when price formed a reversal looking pattern (false break) below prior support at 92.65, leading to a sharp rally. As the Dollar Index has not breached this level yet, that potential reversal pattern remains valid and so today’s bullish engulfing candle could signal the resumption point of the new upward trend.
All that being said however, the Dollar Index is still stuck inside a bearish channel and remains below all the main moving averages, as per the chart. So despite the potential reversal signs mentioned above, the trend is still clearly bearish. For that reason, bullish traders will need to proceed with extra care as the selling could resume at any moment. It is therefore important to pay close attention to key resistance levels such as the area shaded on the chart between 94.95 and 95.15 (if we even get there!). This is where prior support meets the top of the bearish channel. Only when the Dollar Index breaks through this region can we confirm the bullish reversal.
Conversely, if the buyers fail to show up in significant numbers soon and the DXY breaks below the 61.8% Fibonacci support at some stage then a deeper correction could be on the way. In this potential scenario, one will then need to watch the next Fibonacci retracement level down, namely 78.6%, at just below 92.80. Thereafter are the prior price reference points at 92.60/5 and 91.90/5.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.