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All eyes on the Fed and the US dollar

The US nonfarm payrolls number surprised to the downside on Friday, sending the US dollar plummeting as investors and traders reassess the likelihood of a summer interest rate increase. As far as the daily chart for the US Dollar Index goes, the turnaround was not the greatest surprise.

From a purely technical perspective the index experienced a bear trend bounce at the start of May after a sustained sell-off from the December peak. The oversold conditions triggered a recovery back up to the 100-day moving average at 95.90/96.00 (the blue line above). This moving average sat just above the upper (downward-sloping) trendline and, as you can see, we only managed to close above this trendline last Tuesday, before prices collapsed on Friday.
Also worth noting is the 61.8% Fibonacci resistance at the same level – so we have three clear reasons for sellers to be looking for fresh short positions and these combined resistances, helped along by the weak economic release, certainly did the job.
All of which means that the dollar remains in a six-month bear trend despite the Fed talking up a rate hike, or at least wanting to be seen to be positive on interest rates.
The longer-term weekly chart shows more of a sideways trend over the past 18 months but also a clear negative double top. Last week’s big red candle took out almost all of the previous three weeks’ hard-won gains, most of which of course was registered on just one day as we fell 180 ticks from Friday’s high.

This chart does not look any more positive than the bear trend we see in the daily chart. The big double top signals the end of the bull trend and it seems like the only support at this stage is the 100-week moving average at around 93.80/93.75. This support worked quite well when it was first tested last month – at least, after a spike below this level, the index did close the week above the blue line.
This should be an important factor again in June. Below 93.90 would be more of a negative signal going forward and a break below 93.75 should add pressure. A weekly close on Friday of this week below 93.75 would be another sell signal as we start summer trading.
We are then likely to re-test mid-2015 lows at 92.62 and May 2016 lows at 91.92. The last line of defence for bulls is going to be the trendline I have drawn in the weekly chart above. This comes in around the 91.80/91.70 area at the end of June to the beginning of July. A break below here is likely to see losses accelerate into the autumn targeting the 2014 highs of 90.15/89.65.
Jason Sen
Technical Analyst & Trader
For more information, trading education and offers visit InterTrader Direct
The content of this article is the personal opinion of the author and not InterTrader Direct. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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