US dollar bull trend likely to dominate into 2017
Recently I wrote about the strength of the US dollar, and in particular the break of the 2015 high of 100.51 in the US Dollar Index. Although this week we dipped back below this level as far as 99.85, I do still think the bull trend will push the dollar higher into next year.
This bout of profit-taking has held the four-month trendline support absolutely perfectly at 99.85/99.80. This is just above an important 23.6% Fibonacci support at 99.66 on the daily chart, as we hit oversold levels in the daily stochastic. See the chart below.
This means that bulls appear to remain well in control of the six-month trend. All that we need now is a push above some short-term resistance at 100.55/100.60. You can see this in the chart below. Once through 101.00 we should be on the way to re-test the November high at 102.05.
If we can just close this week above a 15-year 61.8% Fibonacci resistance at 101.42, there’d be encouragement for bulls into next week. The next major target for the index would then be 103.50/103.60. This would be followed by 104.10/104.20 and perhaps as far as 105.50/105.60.
In the very short term, failure to beat 100.60 risks a re-test of this week’s low at 99.85. Just below here we have important short-term support at 99.70. Accordingly, this is where I would expect bulls to be stepping in again. Only a break below 99.40 would cause me to question the bull trend at this stage. Further losses could initially target 98.30/98.20.
The euro bites back
One currency which has managed a strong bounce back against the dollar is the euro, after initially plunging on the Italian referendum result. Short traders consequently dived in to cover their positions with the referendum result pretty much as expected. This pushed the pair back up to a high of 107.96.
An extremely bullish candle has signalled to many the end of the bear market and perhaps the beginning of a more positive trend. I personally, however, do not believe this is the case. This looks to me like a short covering exercise, but the longer-term bear trend remains dominant.
In the daily chart above you can see how the 23.6% Fibonacci resistance at 1.0775 has held the rally. Clearly we’re now starting to turn lower.
This level also coincides with resistance at 1.0800/1.0810 on the shorter-term chart. Therefore I would need to see at least a two-day close and preferably a weekly close above 1.0800 to think we could continue little higher.
If so we would test the October low at 1.0848. Consequently we could even make it as far as the June low at 1.0909. However, I would be looking to short again in that low-1.0900 area.
Technical Analyst & Trader
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