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US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

Paul Robinson, Strategist

US Dollar, EURUSD Technical Outlook:

  • US Dollar Index (DXY) at confluent support
  • EURUSD trying to break free, squeeze higher

To see what fundamental drivers and technical signposts DailyFX analysts are watching, check out the Q2 forecasts for various markets on the DailyFX Trading Guides page.

US Dollar Index (DXY) at confluent support

Last week, the US Dollar Index dropped with force into confluent support arriving via the underside trend-line of a wedge pattern and the 200-day MA. The combination of the trend-line with the widely-watched moving average makes it a strong level of support.

This also makes support a potentially make-or-break point for USD. A breakdown below confluent support may be all that is required to garner enough sellers to push the Dollar over the edge and seriously undermine the uptrend (albeit sloppy) since early last year.

A sustained drop through last week’s low at 96.46 should have the DXY on its heels new levels of support; 95.82/74 (Feb/Mar lows) and 95.16/03 will be next up as potential targets, with sub-94 or worse in the cards.

For now, the confluence of support (t-line/MA) is still holding and a such it is prudent to respect it for as long as it holds. Longs can use it as a backstop while would-be shorts can use it to determine when the path of least resistance may turn more favorable.

US Dollar Index (DXY) Daily Chart (confluence of support)

US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

US Dollar Index (DXY) Weekly Chart (bottom of wedge)

US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

EURUSD trying to break free, squeeze higher

The Euro is the big player in the DXY with its ~57% weighting in the index. Last week’s rise has significant pressure on the top of a falling wedge in place since September. While every small rally has quickly fizzled after momentum turned lower, last week we saw price action that could be indicative a change in behavior important moving forward.

As I wrote about following Wednesday’s reversal-day at trend-line resistance, momentum should turn back in favor of shorts as it has on numerous occasions since last year. However, the turn down was quickly quashed with strength on Thursday and Friday, overtaking the reversal event. This change in behavior is worth noting if EURUSD can continue to maintain a bid in the days ahead.

Price is very close to trading above all trend-lines as well as the 200-day. Just as the DXY is sitting on important support, if the Euro rallies much higher here, then we could see a persistent surge out of the single-currency.

With volatility having dropped to such low levels we are due for a breakout. The 2008 trend-line near 12000 could come into play in the weeks and months ahead if the power of the falling wedge is realized.

EURUSD Daily Chart (change in behavior underway)

US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

Q2 Euro Forecast

EURUSD Weekly Chart (falling wedge nearly broken)

US Dollar at Tipping Point, EURUSD Has Big Squeeze Potential

Forex & CFD Trader Resources

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.