US dollar has staged a bounce back over the past six weeks – so what next?
The US dollar index is the best indication of the dollar’s strength relative to other major currencies, and over the past six weeks this index has staged a marked recovery. But how does this short-term bounce correlate with longer-term trends, and what are the prospects for the dollar into next week and beyond?
The dollar index has in fact been in a strong bull trend since mid-2014 but experienced a fairly deep correction into mid-Q2 of this year, falling from a peak of 100.39 to a low of 93.14 in mid-May. After a strong bounce from here we headed back towards the May low but managed to bottom out just above this level a month later in mid-June at 93.56.
The weekly chart above shows all of this price action from late-2013 onwards. As you can see the longer-term trend is still positive so let’s have a look at the shorter-term daily chart to try to judge the possibilities for the index into the end of the summer.
The peak of the recent recovery was seen in mid-July and, after a small correction from overbought conditions at this stage, we have headed back up to this level this week at 98.15. However we backed away quite sharply on Wednesday and Thursday as we became overbought again. In the short term, at least, there is a risk of more sideways trading into the end of August, meaning another bout of profit-taking into next week.
Failure to beat 98.15/20 triggers a move towards 97.65/60 and perhaps as far as good support at 97.10/97.00. This looks like a good short-term buying opportunity and, as long as we hold above here, the bulls remain in short-term control. However a break below is a signal that the index will remain in a more neutral range-trading scenario over the weeks ahead and risks a slide to 96.75 or perhaps as far as good support at 96.50/40 for the next buying opportunity.
Of course a break above the recent highs of 98.15/98.22 is a positive signal despite overbought conditions and should ensure the six-week recovery is extended to target 98.42/45 and then minor resistance at 98.80/98.85. We will probably need increased speculation about a near-term interest rate rise for a push higher through this level. We can then go on to target short-term trendline resistance at 99.40/99.50 which is more of a challenge for bulls.
Jason Sen – Technical Analyst & Trader
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