DXY: Dollar Index suggests choppy conditions to continue

Despite the strong Non-Farm Payroll data the previous Friday the DXY had a tough week, falling from 96.55 to 94.32, closing under 95.00 at 94.91.The market is now waiting on the Fed, and we may see little action and just chop around ahead of Wednesday. Everyone seems to assume that Janet Yellen will provide some guidance as to when to expect an early rate hike (September?) and traders/investors are itching to buy the dollar as soon as any announcement is made. This may well turn out to be the case given the recently improving data, although right at this time the charts suggest that the upside for the DXY remains rather limited. The daily charts are pretty neutral, as would be expected given the recent choppy consolidation, while the weeklies are still pointing lower as they continue to correct themselves after having become overbought, but they not suggesting any major rally is about to resume for the dollar.

Caution is therefore warranted by the dollar bulls and it will take some effort to regain the 100 DMA (96.16) and last week’s 96.55 high, and I would be a little surprised to see it back above here ahead of Wednesday.

In the bigger picture though, I think that the dollar will eventually find its feet again and will at some stage run up towards 97.00, beyond which would head back towards 97.51 (61.8% of 100.39/93.07), the 1 June high at 97.68 and the important  27 May peak at 96.77. This area will provide stiff resistance but beyond which will head towards 98.68 (76.4% of 100.39/93.07). Beyond this, the descending trend resistance from the 100.39 high is currently at 99.20 and will see sellers ahead of 99.99 (13 Apr high) beyond which would open the way back to, and well beyond, the 13 March peak at 100.39. Further out, although looking somewhat distant at present, targets beyond 100.39 (13 Mar high) will be seen at 101.77 (61.8% of 121.02/70.69), the March 2003 high at 102.15 and the Jan 2003 high at 103.20 but will take a while to get there.

Given that the weeklies remain negative, a cautious Fed could help the DXY head swiftly lower, towards the 14 May 93.13 low, a break of which would then open the way towards  92.43 (50% of 84.47/100.39) and possibly 92.18 (38.2%  of 78.90/100.39). This would only come about if the Fed show any reluctance to go for a 2015 rate hike, which seems unlikely, and overall I suspect that we are in for more choppy trade, but that the 93.13 level will hold and will eventually result in a squeeze back above 97.77 and at some stage will head on to 100 and higher. With the northern hemisphere summer approaching though it may be a while before we see the DXY back at 100. If Greece falls over though it may  happen rather quicker than that.

The overall strategy of buying dips in the dollar remains the preferred view, but expect it to remain choppy, perhaps for the next couple of months.

DXY: Weekly.

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