USD Technical Outlook
- US Dollar Index (DXY) is wedging higher in open space
- Rising wedge often associated with reversals, but not always
- Just following the price action
US Dollar Technical Analysis: Chart Pattern Setting Up for Strong Move
The US Dollar Index (DXY) continues to grind its way higher with various constituents moving in different magnitudes. The largest component, the Euro, at 57% of the DXY’s weighting, is the biggest driver here obviously. However, the Yen is making a strong move and helping push it around a bit with it accounting for nearly 14% of the index. Other key contributors are GBP (12%) and CAD (9%).
But it’s not a prerequisite that you have to watch the individual components to understand where the DXY is going. Keeping it simple one really only needs to watch the price action in the DXY, which at this time is indicating we are about to see a strong move.
The rising wedge forming is nearly complete as it quickly approaching the apex of the wedge. These patterns, rising in a rising market, and falling in a falling market, are often considered to be potential reversal patterns. But this isn’t always the case. Here are the scenarios I’ll be watching.
First, we could see a squeeze higher out of the pattern as the trend begins to accelerate again. A sustained breakout of the pattern keeps the DXY in open space with no visible resistance until the 2001 high over 120. This is a level that is seen as likely to be met at some point in the relatively near future, but not necessarily on this run without a correction first.
Another way this could play out is that we see an initial breakout, but it quickly fails and price falls back through the other side of the pattern. These can make for powerful shorts as this indicates an exhaustion in buying. The third scenario is that we see price fall out of the wedge and the pattern has the often-thought bearish implications. The fourth scenario is we see a breakdown that turns out to be false and price quickly rises through the high of the pattern for a bullish breakout.
This is the nature of wedges, sometimes they break cleanly, sometimes there is a head-fake first. In any event, staying away from the prediction game I will run with the price action in front of us and adjust the trading bias accordingly.
US Dollar Index (DXY) Daily Chart
US Dollar Index (DXY) 4-hr Chart
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---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX