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Barring any new drivers to strengthen the dollar, the path of least resistance is down.
In a widely anticipated move, the US Federal Reserve raised rates 25 basis points on March 15. Counterintuitively, the US dollar slumped on the news — don’t higher rates go hand in hand with a stronger dollar? Fundamentally this is the case, but expectations of a rate hike had been factored in for quite some time, making this a “buy the rumor, sell the news” event. The Federal Open Market Committee did telegraph two more likely rate hikes later this year, but with no near-term news driver there really is no catalyst to further support what has already been discounted.
Technically this is evident, and barring any new drivers to strengthen the dollar, the path of least resistance is down. First support is at the psychological 100 level followed by trend-line support at 98.5. This is a significant inflection point, and closing below this level would violate the multi-year uptrend line indicated in red. As long as the price remains above this level, the US dollar bull market remains intact. Technical indicators have been deteriorating, so it bears watching to see if this is just the pause that refreshes or whether further downside is in the cards.
The most significant indicator, one that tends to have a high degree of reliability and which has been mentioned in previous missives, is the negative divergence indicated by the orange dashed lines. This divergence between price and MACD (a measure of the nine-day and 26-day moving average) indicates whether momentum is increasing or decreasing. In this case, the price made a higher high relative to the prior high from January 2016, yet MACD put in a lower concurrent high. This is known as negative divergence, and on a weekly chart has a close to 70 percent probability of being confirmed by yet lower prices. Whether or not this means that the trend line will succumb is yet to be determined, but if it does then the lower end of the sideways consolidation channel at 92.5 comes into play. A close above 103.8 would indicate that the bulls are back in control and higher prices — potentially MUCH higher — are in the forecast.
US Dollar Index weekly
Source: Investing.com, March 16, 2017
The action on the daily chart is consistent with what is known as an ABC correction, where the second downleg mirrors the first after a period of consolidation. Notice also the negative divergence on the daily.
US Dollar Index daily
Source: Investing.com, March 16, 2017
Conclusion
With no news events on the horizon and with the technical picture on the DX weakening, the path of least resistance is to the downside until proven otherwise. Given the inverse relationship between the US dollar and the majority of commodities and other financial instruments, this has significant implications.
Stay tuned for an in-depth technical analysis of select commodities.
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.
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