Dollar Index slide signalling further gains on EUR/USD

The Dollar Index is considered to be the benchmark by which currencies are measured and there is an intrinsic link between the Dollar Index and its largest constituent, the euro. The Euro accounts for 58% of the Dollar Index. It may come as little surprise therefore that key levels on the Dollar Index can be equated to key levels on EUR/USD.

dollar euro

For the first time arguably since October, the Dollar Index (DXY) has begun to trade decisively below its 21 day moving average (which has been an excellent gauge of support through the bull run. This suggests that DXY is retreating back towards the old key range from late January/February. This level is 95.5 which marks the top of a trading range 93.25/95.5. I find it interesting that DXY is back to around the levels at which it was trading just prior to the latest Non-farm Payrolls report which had sent traders into a frenzy of dollar buying. Effectively, the market has simply unwound the exuberance of that run higher since 6th March.

The Dollar Index is still trading well above its primary uptrend and I continue to believe that this as a correction within the uptrend. With this support range 93.25/95.5 in place and the uptrend coming currently around 93, this means that there could be a further correction of between 1%/3.5%.



So how does this equate to trading the euro? It is interesting that the support at 95.5 came on 23rd January and this was the same day that a previous sharp sell off started to bottom out on the euro, with EUR/USD finding a low at $1.1098. This old support however becomes the new resistance for the rally. This low at $1.1098 also marks the bottom of a trading range between $1.1098/$1.1532. This is the next key overhead resistance band which is around 1% to 5% above current levels around $1.1000.

We have seen the euro starting to look to rally above $1.1000 resistance today. The initial moves have just struggled to gain traction, but with positive momentum indicators, I expect this move will continue higher for the near term as this correction on the dollar continues.



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