US Dollar Index bounces off important longer-term support
The US Dollar Index experienced a strong rally from May 2016 until a peak at the beginning of this year. Since then we have been in a correction phase. Eventually yesterday we broke the February low at 99.23.
Although a break of a monthly low is significant, it is far more important that the price managed to bounce off the 11-month trendline. This goes back to the beginning of that rally in May 2016. In the daily chart below you can also see the red 200-day moving average line just below the 11-month trendline adding further support from 98.90 down to 98.70.
A low therefore yesterday at 98.86 means a perfect bounce off important support in extremely oversold conditions.
When you consider that we are already in a bull trend this is an absolute textbook buying opportunity for the US dollar. Short-term targets are at 100.00 and 100.70/100.80. A break up through the 100-day moving average at 101.10/20 would be further bullish confirmation. This would signal a resumption of the longer-term bull trend.
Closer examination: the dollar pairs
EUR/USD spiked up through the 200-day moving average at 1.0880 yesterday to reach a peak of 1.0904. This was not quite as far as the 61.8% Fibonacci resistance at 1.0932. The break could not be sustained with the pair closing back below 1.0880 on Monday evening.
In extremely overbought conditions a rejection of this 200-day moving average, after a good recovery throughout March, signals the potential for a correction, at least into the beginning of April.
When USD/JPY broke the February low of 111.57 this signalled further losses to the next target in the form of the 200-week moving average at 110.10. This is the exact low yesterday and again in oversold conditions we are now looking for a recovery.
The weekly chart below reminds us that the pair is actually in a multi-year longer-term bull trend. So buying back into this trend at the 200-week moving average is a pretty sensible strategy.
Focus on AUD/USD
AUD/USD has been in a multi-year bear trend with the dollar strengthening again since 2011. In the weekly chart below you can see how the bounce in early 2016 was held by the 23.6% Fibonacci resistance at 0.7828. (This line is taken from the peak of that move in mid-2011.)
The daily chart below shows the big sideways action for the last 12 months. We peaked again at the upper end of the sideways channel midway through March. We now have a three-month trendline at around 0.7580/0.7590, which is the only support of any importance at this stage.
It looks likely that we will eventually see a break below here to target 0.7545 and 0.7510/00. However, if we are to re-test the lower end of this sideways channel, we will ultimately be heading towards the 0.7150 area.
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