USD Graphic Rewind: Bullish Outside Week Formed; Where to from here?
The dollar index raced higher on Friday to close sharply higher for the second consecutive day as impressive payroll data and rumours of a Greek exit from the euro fuelled both US dollar gains and euro losses. The question that everyone wants answered is; where do we go from here?
This is a very difficult question to answer considering the nature of the reversal that we saw in the last few days of trade last week. It was a reversal that we expected to play out over the course of several weeks, the carving of a meaningful bottom in the index, one that could be built off into a period of relative US dollar strength. However, the sharp and violent nature of the reversal makes us slightly wary that it could be short lived as US dollar bears jump right back into the market at more attractive levels.
It appears to us that we stand at something of a crossroads and we look to gauge direction of the market by assessing where market sentiment is. Since markets move in a cyclical or wave-like fashion we will look to see if sentiment has shifted away from selling the buck and back to concerns with EMU debt problems – two problems the market has oscillated back and forth between for some time now. If the market focus is back on the EMU and its weaknesses then we could see an extended period of US dollar strength (and euro weakness on the flip side) but if sentiment remains unchanged and euro bulls let negative news about the EMU periphery continue to wash off them like rocks on the seashore then we have little reason to think that anything has really changed and as we mentioned above US dollar bears will jump right back into selling the buck.
We discussed last week the potential for a bullish-outside week in the dollar index which we have seen form in dramatic style. A bullish outside week at the bottom of such an intense down trend (as we see above) is usually a good early sign that further gains are likely. While we continue to wait to get a firmer grip of market sentiment, as mentioned above, we see this bullish formation as a good early indicator for potential further USD gains in the early week. On the whole though, we would recommend standing aside, for now, until clearer signals make themselves known.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.