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US Independence Day ahead, so let’s take a look at the US dollar

First things, first. If you trade the US dollar index, you will have noticed the decreasing volatility over the past several years. In fact, in the first half of this year we have held an incredibly narrow range from a high of 81.52 in January down to a low of 78.93 in May. For those looking for increased volatility in the second half of the year, which I would imagine is most of the Fx traders out there, there is perhaps a bit of light at the end of the tunnel… Or should I say at the end of the triangle formation you see in the monthly chart below?

When price breaks out of a triangle such as this one would often assume it could be the start of a trend so perhaps the second half of 2014 will be a little more exciting for the US dollar than the first half. If we now take a look at the weekly chart the picture starts to get clearer. Since May 2011 it’s quite clear that the dollar has been in a general uptrend and although the past 12 months have seen more of a sideways movement, the uptrend is actually still intact as you can see from the lower trend line.
I have re- drawn the downward sloping trend line of the recent triangle on this weekly chart and it’s quite interesting to see what happened in May. Within the blue circle you can see a spike lower through the horizontal trend line down to the longer term trend line and the sharp bounce up, which no doubt triggered a few stop losses on longs and perhaps some fresh short positions, as it looks like there was a bit of a short squeeze that followed. The result was a break above the downward sloping trend line, quite a positive signal.

We are now hovering just above very strong support from two trend lines. The first one as I mentioned started back in May 2011 and second is a much flatter trend line which started in September 2012. Interestingly you can see how both trend lines are now intersecting at around the 79.40 area and this should therefore act as strong support for any weakness in the coming months. However it may just be the case that we don’t even fall as far as this area with 200 week moving average support in the 79.70 area giving good potential for a floor over the summer months. The 100 week moving average has certainly been doing a good job as support and resistance. At the moment it stands at 80.98 which is a realistic target for any strength over the summer and will of course be a major obstacle for Bulls.
So the outlook appears to be fairly positive for the US dollar index as long we remain above those key weekly support areas. Let’s take a quick look at the daily chart now to see what it has to offer.

This highlights a slightly more negative trend in the first six months of this year. The recent sell-off from the upper trend line in mid-June has taken us to a midway point within the channel. Did you notice how the daily stochastic is severely oversold? Today in fact we are already seeing a strong bounce back.
So it appears the US Dollar has scope to begin to trend higher in the second half of this year. Perhaps an increase in interest rates will start to become the focus. The positive outlook would be further reinforced if we beat the 100 and 200 day moving averages at 80.12 and 80.34. If that is the case, I see the six-month trendline at the 80.90/81.00 area being challenged. Note how this coincides perfectly with the 100 week moving average! I will be personally waiting for a clear break above this level before I join the bulls in gaining control and re-establishing the positive 4 year trend.
Jason Sen
Daily Technical forecasts US, Europe & Asia
Equity Index, Commodities, Forex & Fixed Income

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