US Dollar Still Correcting?

In my January analysis of the US dollar index titled The Buck Stops Here?, I suggested that there was a good probability that the DX was in the process of establishing an interim top. Although there was a mixed bag of signals muddying the picture, the key indicator that stood out was a negative divergence between price and moving average convergence divergence (MACD). Negative divergence is an early warning signal that an inflection point may be imminent.

Source: Investing.com, January 3, 2017

As indicated by the orange dashed lines, divergence is represented by higher highs of price concurrent with lower highs of MACD. This indicator has a historically high incidence of reliability.

Source: Investing.com, February 14, 2017

Sure enough, the buck was halted in its tracks on January 3, and has subsequently traded down through support at 100.3 until the recent rally back above 101, inclusive of US Federal Reserve Chair Janet Yellen’s February 14 testimony regarding future interest rate hikes.

While still cloaked in uncertainty, futures are indicating a low probability for a March rate hike followed by a better than 50 percent chance for a June hike. While not a fait accompli, this jives with the technical picture that suggests that the recent rally may be getting long in the tooth. RSI (relative strength) is approaching overbought territory, MACD rolling over on the hourly is telegraphing similar action in the daily and price is stalling at 101.4, an area of previous resistance.

A continuation to the downside would suggest that this may be the midpoint of an ABC correction with 98 as the logical target, coincident with the red upward sloping trend line. An ABC correction sandwiches a consolidation pattern (A to B) between mirrored downlegs. The first downleg exhausts itself of sellers at point A, then buyers support the price temporarily until sellers resume control (B to C). This action would be consistent with the expectation of no March hike and less impetus for a stronger dollar near term.

The implication of a correction is that once it runs its course higher prices could be expected. This would not be surprising if indeed the Fed raises rates in June.

Conclusion

All else being equal, until the uncertainty of a rate hike is off the table it would make sense for the DX to be range bound with 98 to 101 as a possible trading range. Above 101.4 the next major resistance is 103.55, beyond which suggests further rate hikes and a significantly stronger dollar. A potential game changer, however, is triggered if trend-line support at 98 is broken. This would reverse the momentum back into the multi-year sideways consolidation channel between 92 and 100 with a renewed possibility of lower lows and the potential for a major boon for commodities.

Hurry up and wait…

Don’t forget to follow us at @INN_Resource for real time updates! 

Terry Yaremchuk is an Investment Advisor and Futures Trading representative with the Chippingham Financial Group. Terry offers wealth management and commodities trading services. Specific questions regarding a document can be directed to Terry Yaremchuk. Terry can be reached at tyaremchuk@chippingham.com. 

This article is not a recommendation or financial advice and is meant for information purposes only. There is inherit risk with all investing and individuals should speak with their financial advisor to determine if any investment is within their own investment objectives and risk tolerance. 

All of the information provided is believed to be accurate and reliable; however, the author and Chippingham assumes no responsibility for any error or responsibility for the use of the information provided. The inclusion of links from this site does not imply endorsement.