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US Dollar Technical Analysis: Breakout Looms As DXY Has Bullish Momentum

US Dollar Technical Analysis: Breakout Looms As DXY Has Bullish Momentum

2018-10-22 19:30:00
Tyler Yell, CMT, Currency Strategist
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US Dollar Index (DXY) Key Points:

  • The ONE Thing: The positive technical picture for the US Dollar Index is now aligned with the positive fundamental and sentiment backdrop. The Fed is looking to hike further saying they see themselves still away from the neutral rate while dissipating risk appetite is making higher yielding US Treasuries likely an attractive place for global capital flows that could keep USD bid.
  • Technical studies of the US Dollar crosses show EUR/USD moving toward a key summer pivot at $1.1430 and GBP/USD at $1.300
  • Global yield curve spreads continue to favor capital flows shifting to the US Treasury markets as US-China 10yr yield curve spread now at 7-year lows.
  • Technical Outlook on the US Dollar: The US Dollar has bullish momentum per the Ichimoku Cloud indicator, which could precede a move to the August high of 96.60/98 or higher with support in focus at 94.30.

Unlock our Q4 forecast to learn what will drive trends for the US Dollar through the rest of2018!

Markets have been placed in binary mode at the start of Q4 as the US Dollar’s gain is increasingly built on the back of other key market’s pain. The following markets have captured trader’s attention that seems to be building on a Fed that does not see themselves near neutral that could keep put flattening pressure on the US yield curve as well as keeping capital flows directed to the US to keep the US dollar strong:

  • EUR/USD has aggressively moved toward the early October low of $1.1432 and is trading below the summer pivot of $1.15 as CFTC data shows an increase in short EUR positions by hedge funds
  • GBP/USD was unable to break the September high and has since moved to test the 55-DMA below $1.3000 and the October low at $1.2922.
  • USD/CNH is moving toward the 2018 high (CNH weakness) of 6.9586 despite backing by the Chinese government to support risky assets on the announcement of a sweeping personal tax cut, together with a recent rise in the tax threshold showing the market is revering its optimism.
  • AUD/USD and NZD/USD are moving lower toward A$0.7040, and NZ$0.6500 per US Dollar after false bullish signals may give way to further losses.

The above technical developments all have one key theme, a breakdown in favor of the US Dollar that could continue with little fundamental developments arguing otherwise.

Please add a description for the image.

Technically Speaking – A Weak Bounce On Extreme Sentiment

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Traders of the Elliott Wave persuasion have one key question on their mind; are we in the midst of a correction that will likely find resistance at the August high of 96.60/98 before moving back lower or have we already completed a correction?

If the former, the rally likely has little room to run and is surely not worth chasing. If the later (the correction completed on September 24 well within the pre-defined support point of 93.33-92.83) then bulls should hold on to their hats and watch as Emerging Markets enter a new threshold of pain.

The first indication of the later taking place (the main opportunity for multi-week trend followers) would be on a break and weekly close above the August 15 price range. Favoring this view is the indication of bullish momentum per Ichimoku as the lagging line has broken above the cloud.

The bullish view would be invalidated on a break below the October low of 94.30.

New to FX trading? No worries, we created this guide just for you.

MORE DFX SUPPORT FOR YOUR TRADING:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

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