Panic Driving DXY Higher into Lofty Levels

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USD Technical Outlook

  • US Dollar Index (DXY) in high territory, a reversal could develop relatively soon
  • Panic selling in GBP helps propel the index higher, but declines

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US Dollar Technical Analysis: Panic Driving DXY Higher into High Levels

The US Dollar Index (DXY) continues to push into high territory with a significant upper slope coming into play and the 2001 high not so far away at 121. The slope is something we need to worry about now, but as it extends higher. from 2009 we have to give it a whirl and look at the weekly/monthly charts.

Upslopes running in the direction of an uptrend (slope = resistance) make the line slightly less significant as resistance than if it were an upslope rising as support. With that in mind, it is still respected, but of course only if the appropriate price action develops.

Given the age of the line, we must look to the weekly and monthly charts for guidance. Daily play around the line has less meaning. We could see the line exceeded from day to day, but if on a weekly or monthly closing basis the DXY fails to cross it and/or reverses shortly after overcoming resistance, then it could have considerable consequences.

If we don’t see sellers intervene soon, the 2001 highs are up as resistance to watch. Whether we see it during this run or not remains to be seen, but it can be a stretch without first seeing a pullback develop. The thinking for some time is that the summer retreat in the dollar and accumulation of shares would give way to a resumption of trends dating back to the beginning of the year. October was a tempting time to think we could see a drop in stocks, a pullback in the dollar, as seasonal trends favor such a scenario.

The S&P 500 is nearing a new low but not there yet, and on that basis it seems likely that we will see a significant new low in stocks first before a big bounce develops. If this is the case, then the dollar is very likely to continue to hold a bid to act quite strongly.

GBP went into full panic mode on Friday in the early hours of Sunday trading, but we have since seen a big reversal. GBP is only a small part of the DXY index, but when it swings around 3-5%, its impact on the DXY will be felt. It looks / feels like we may have a short-term dip in GBP, but expect volatility to remain high.

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Monthly Chart of US Dollar Index (DXY).

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—Written by Paul Robinson, Market Analyst

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