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Signs point to Dollar Index turning bullish

THE Dollar Index (DXY) double bottom pattern tested the neckline in February 2018 and completed in May. After which, the bullish streak of the DXY took a breather. It has since broken below the uptrend line, and prices remain range-bound between US$96.036 and US$94.200.

Nonetheless, based on the two indicators below, we are expecting the bulls to regain control and break above from this trading band soon.

Exponential Moving Average (EMA)

The EMA is commonly used to gauge the general trend as it helps to filter noise from random price fluctuations. It puts greater emphasis on prices which are more recent and is also used to determine support and resistance levels. In terms of price action, when prices are well and truly clear above 100 and 200 EMA, it can be interpreted that the DXY is still in a bullish trend. As the 100 and 200 EMA are primarily used to indicate medium to longer term trends, prices would have to retrace quite a bit before reversal.

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When we look at the 20 and 40 EMA that measures the short term trend, we observe that prices tend to rebound off the 40 EMA support. This indicates that buying strength is still present and support levels are resilient. Looking at the lower band of the channel, prices have rebounded off the strong US$94.200 support level. Based on Fibonacci retracement, from the US$103.820 high in January 2017 to the US$88.253 low in February 2018, we note that the trading band coincides with the 38.2 per cent and 50 per cent levels. This reinforces the support and resistance levels. If there is a breakout in either direction, the strength can be significant.

Relative Strength Index (RSI)

RSI measures momentum. A reading above 80 represents overbought conditions while a reading below 20 represents oversold conditions. Therefore, with the RSI at the mid-way mark of 53.18, there is a possibility for upwards reversion. The RSI retracing from its overbought condition in May 2018 further substantiates our view.

From a fundamental perspective, the current market dynamics are supportive of a stronger US dollar. During the latest FOMC statement, the Fed said that "economic activity has been rising at a strong rate", taking a more bullish view than before. There was also no mention of the rising US-China trade tensions. These sentiments are in line with its previous hawkish statements, pointing to a higher probability of the Fed raising rates two more times before the year ends. A higher interest rate environment will strengthen the DXY as it tends to attract foreign investment and in turn raises US dollar demand. With the Fed still deemed to be more hawkish than other central banks, more strength for the US dollar entails.

Looking ahead, if prices break above the upper band of US$96.036, the DXY may find the next meaningful resistance at US$97.873, the 61.8 per cent Fibonacci retracement level.

  • The writer is investment analyst, Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice