US Dollar Index

U.S. Dollar Index (DX) Futures Technical Analysis – Ripe for Rebound Rally Following Test of Key Support Area

The U.S. Dollar is inching lower against a basket of major currencies on Tuesday, but off its lows in an early sign that the recent selling pressure may be subsiding. The reasons behind the slowdown in the selling pressure may be technical factors or the start of position-squaring ahead of Friday’s U.S. Non-Farm Payrolls report.

Worries about the Euro Zone economy are pressuring the Euro against the U.S. Dollar. Lower oil prices are weighing on the commodity-sensitive Canadian Dollar. Gains are being limited, however, by a rise in the Japanese Yen due to falling Treasury yields.

At 06:59 GMT, September U.S. Dollar Index futures are trading 105.290, down 0.046 or -0.04%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is at $28.18, down $0.11 or -0.39%.

Earlier in the session, the U.S. Dollar Index hit its lowest level since July 5 while testing a key retracement zone that some traders may perceive as a value area. Longer-term traders may view this as a buying opportunity with limited downside.

Play for Recession or Additional Rate Hikes?

Although the U.S. Dollar is down from its multi-year high set at 109.140 on July 14, it’s back to where it was prior to the last U.S. Consumer Price Index (CPI) report. If you recall, the dollar index shot to its high after strong inflation data drove up expectations for a 100 basis point rate hike by the Fed at its July meeting.

The index began to fall after Fed policymakers downplayed the need for a full-point interest rate hike. It fell further after Fed chair Powell suggested the need for the Fed to remain flexible and U.S. economic data indicated a weakening economy.

So what does an investor do? Bet on a recession and a slower pace of rate hikes, or additional Fed rate hikes to drive down inflation?

In my opinion, the Fed is going to keep raising rates until inflation gets to the mandated 2% level. It can’t afford not to. However, it is going to be more flexible as far as the size and the timing of future rate hikes are concerned.

This doesn’t sound bearish to me. Driving the dollar to a multi-year high because speculators thought a full-basis point rate hike was needed was too bullish. But the current correction isn’t too bearish, it was necessary.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. However, momentum is trending lower. A trade through 103.200 will change the main trend to down. A move through 109.140 will signal a resumption of the uptrend.

The minor trend is down. This is controlling the momentum. A trade through 107.300 will change the minor trend to up.

The main range is 101.170 to 109.140. Its retracement zone at 105.155 to 104.215 is potential support. The index tested this zone at 104.920 earlier today.

The short-term range is 103.200 to 109.140. Its retracement zone at 105.470 to 106.170 is potential resistance.

Daily Swing Chart Technical Forecast

Trader reaction to 105.155 and 105.470 is likely to determine the direction of the September U.S. Dollar Index on Tuesday.

Bearish Scenario

A sustained move under 105.155 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the Fibonacci level at 104.215.

Bullish Scenario

A sustained move over 105.470 will signal the presence of buyers. If this generate enough upside momentum then look for a surge into the 50% level at 106.170.

Side Notes

A close over 105.340 will form a potentially bullish closing price reversal top. This won’t change the trend, but if confirmed, it could trigger the start of a 2 to 3 day correction.

For a look at all of today’s economic events, check out our economic calendar.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.