This year has so far been quite good for the dollar…
The U.S. dollar index (DXY) is currently up 3.28% year-to-date.
But it hasn’t exactly been smooth sailing. Along the way, the dollar has suffered through two periods of significant decline.
The first was between February 14 and March 8. During this time, DXY declined by 2.49%.
The second was between April 16 and May 16. This time, DXY declined by 2.29%.
The first pullback in DXY led to a rally to new yearly highs. After DXY bottomed in March, the dollar went on to rally 4.06%
So far, DXY has rallied 0.99% after the second pullback that ended on May 16. The big question is whether or not we’ll see another rally to new highs.
The fundamental catalyst that will shape the dollar’s future will be the next major shift in policy from the Fed.
Going Up or Down
Traders have been poring over economic data to try and figure out when the Fed will signal that it’s time to start lowering interest rates.
And as I said last month, much of that data has been a mixed bag.
It’s why although the dollar has been steadily rising this year, a lot of the trading has been very messy with big swings in both directions.
And now, the dollar is at yet another critical juncture.
It looks like we’ll either get another rally to new yearly highs… or a significant sell-off that will take DXY into negative territory for the year.
I’ve prepared an updated chart of DXY below so we can be prepared for either scenario.
The key feature of this chart is the parallel channel (blue lines) that’s contained the entirety of this year’s price action.
Every time we get near the bottom of the channel, the possibility of a trend reversal heightens.
A strong break below the channel would be an early warning signal that the uptrend in the dollar may now be at an end.
On the other hand, so long as we stay within the channel, we shouldn’t rule out the possibility of further dollar strength.
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Either way, the dollar seems to be on the cusp of another big move – either up or down.
The smart thing to do right now is simply to wait… and let the market show its hand. If we get a breakdown out of the channel, then the direction of the dollar is likely lower.
On the other hand, if we see a series of bullish trend continuation setups like bull flags and triangles, then we’ll likely see another new yearly high.
Happy trading,
Imre Gams
Analyst, Market Minute