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USD Technical Outlook: DXY Squeeze Set to Continue

USD Technical Outlook: DXY Squeeze Set to Continue

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USD Technical Outlook

  • US Dollar Index (DXY) squeeze took market by surprise
  • A small digestion period would do some good for further gains

USD Technical Outlook: DXY Squeeze Set to Continue

Last week, market participants were caught leaning the wrong way as an overcrowded short USD trade unraveled in the wake of shifting rate expectations from the Fed. The 2% weekly gain in the DXY was the largest since coronavirus sent shockwaves through markets in March of last year.

The rally appears set to continue, but maybe not before a little backing-and-filling takes place. This morning, the dollar is off modestly and could find itself see-sawing in the near-term as it digests the initial burst.

A short period of horizontal price action could be good for both setting the DXY up for further gains and providing traders with something to work with in the form a consolidation breakout pattern. For existing longs from good prices, sitting tight for now looks like a prudent play. For shorts, appeal is very low until at least we see some resistance levels ahead tested and rejected.

First up as resistance is a trend-line running lower from September over the March high. This isn’t considered a significant level of resistance at this juncture, but we will need to see how price behaves in the event the line is touched.

More significantly, the March high at 93.43 appears to be the next big hurdle to watch out for. The thinking is we may see that level here fairly soon. Things could become quite interesting at that juncture as it is the year high and the last lower-high in the downtrend from the March 2020 high.

For now, in the very short-term the focus is on watching for a consolidation pattern to form for continuation-style trades. If we see a pattern form and break then we will look for the aforementioned levels to get tested. If we see a larger retracement develop, then the 200-day could come into play at 91.51, and possibly support around 91.30. But given how strong of an up-move we just saw, and how short the market is, if the DXY is to continue higher we likely won’t see much of a retracement.

US Dollar Index (DXY) Daily Chart

usd index daily chart

DXY Charts by TradingView

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---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.