It’s been all about the dollar since mid-April
The dollar’s momentum over the past few weeks has been relentless, and if today’s European trading is to go by, the green back looks set to post another solid day of gains.
So, let’s answer the first question. Is the dollar rally running out of steam?
If you look at the daily chart, the dollar index broke the long-term downwards trendline towards the end of April and built momentum from there to break above the 100-day (red line) and 200-day (blue line) MAs. The latter being a key break as the dollar index hasn’t traded above it since May 2017.
And buyers haven’t been able to break above both daily moving averages since March 2017. Put short, the run here still has some breathing space and room to go if other key aspects (fundamentals, geopolitics) allow for it.
If that is the case, then what levels should we be looking for in the dollar?
At this stage, buyers look to have all but broken resistance at the 2 August low @ 92.55. That opens up room for the dollar index to move towards 94.00 and a test of the 38.2 retracement @ 94.30.
Not much else is standing in the way of here and those levels from a technical perspective in my view, so that shows how much more this rally could actually go.
Beyond that, it will be the 27 October high @ 95.15. But we’ll only get to it when the first round of resistance levels fail to hold.
I’ve mentioned before in many different ways, either by saying “don’t stand in front of a moving train”, “never catch a falling knife”, or in more direct terms that “the market has put the issue of the twin deficits in the back pocket for now, and it’s best not to fight it” or something along those lines.
The market will do what it wants to do. There are merits for the dollar to be weaker than it currently is, and they are in fact solid arguments. But there’s a time and place for everything, and now is not the time for that.