The U.S. dollar could finally be getting ready for its next big move…
Since putting in a major bottom on December 28, the dollar index (DXY) has risen sharply.
By February 14, DXY had rallied as much as 4.33%.
But this phase of dollar strength could now be getting ready to turn into a period of dollar weakness.
And that means some great trading opportunities on the horizon for currency traders.
Which Way Will DXY Go?
It’s all got to do with DXY’s price chart…
On February 20, DXY broke down and out of a parallel channel that’s contained the entire rally since that December 28 bottom.
That’s exactly what you would want to see if you’re looking for a bearish reversal.
Since then, however, the dollar has mostly traded sideways.
This can mean one of two things.
The first scenario would mean the breakdown is a head fake. And the sideways action in the dollar is a sign that bears are not in control of the market.
The second scenario is that the dollar is simply consolidating under the broken channel. The sideways action is a buildup of pressure. And if the dollar breaks down again, we’ll see a fierce move lower.
You can check out DXY’s price chart below.
For your reference, the blue lines represent the parallel channel. The red lines represent the more recent sideways action.
As you can see, the action in the dollar has been rangebound since breaking out of the parallel channel.
The range has been relatively narrow with prices bouncing between 103.65 and 104.10. This means we likely don’t have too much longer to wait before the market makes up its mind.
If prices break strongly below 103.65, then being short the dollar will become a very high probability play.
On the other hand, if prices break out above 104.10, it will only muddy the waters further. An upside breakout doesn’t necessarily mean the dollar will continue rampaging higher.
For the dollar to truly become a bullish bet, we’d want to see prices trade back above the broken supporting line of the blue parallel channel.
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As of writing, that would mean DXY would need to climb back above 104.60.
All this is to say that the easiest way to trade the dollar would be for DXY to continue breaking down.
If this happens, then currencies like the euro and the Great British pound will rise in value against the dollar.
On the other hand, if the dollar regains a bit of its strength, it’s best to stay on the sidelines until the technical picture becomes clearer.
Traders will also want to keep an eye on the March 8 employment reports. These reports will be released at 8:30am ET and will likely determine the future of the dollar for the next several weeks.
Once the dust settles after the next round of employment reports, we’ll have another update on the dollar for you.
Until then, happy trading.
Imre Gams