Breakout on Tap Next Week? USDOLLAR Index Eyes Flag Top
It's the end of the month, which means fund managers and traders alike will be revisting their books. This rebalancing effect - the reallocation of capital across asset classes based on relative over/underperformance - tends to have a profound impact on FX markets as light hedging is sought or profit taking is undertaken.
Accordingly, the bull flag that has formed in the USDOLLAR Index may need to wait a few days before commencing - even as price action the past two days has been constructive within the consolidation, and the range top has come into focus.
The current consolidation in the USDOLLAR Index since July 15 is being viewed as a bull flag in context of the break of the downtrend from the April and June swing highs. With H4 indicators returning to bullish territory (daily and weekly Stoch and MACD already in positive territory), momentum may start to gather pace (we what call "full timeframe continuity") should recent swing highs near 12063 give way; risk should be contained just below recent range lows near 11977.
The alternative outcome (the main one we're considering given current information, amid a nuanced set of possible future outcomes) would be for a double/triple top forming against 12063 with a break under 11977. In that case, the measured move would point towards 11891. which would result in a retest of former trendline resistance off of the April and June swing highs.
See the above video for technical considerations in EURUSD, USDJPY, USDCAD, AUDUSD, and the USDOLLAR Index.
--- Written by Christopher Vecchio, Currency Strategist
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