03/12/2014: Building for a new wave of dollar strength

There have been a series of dollar bullish signals in the past 24 hours. The big question is whether this is finally going to be the greenback breaking the shackles or whether this will be another false dawn (there have been s few over the past month).

Euro and Dollar

I wrote yesterday about the Dollar Index (.DXY) which was on the brink of breaking out. Today with a weakness in the euro (the movement in the euro accounts for around 57% of the Dollar Index), we have seen .DXY move out above its 2010 peak of 88.708 and now stand at its highest level since March 2009. The next key resistance comes in at 89.624.

On a technical basis, the breakout to a new high could actually be considered to be a bullish rising wedge breakout, however for the sake of conservatism , I will just call it a rising channel breakout. This means that measuring the depth of the channel and projecting higher from the breakout, this gives a next target at 89.370, which suggests that the March 2009 peak of 89.624 is within range.

DXY   03122014

Looking at the euro though it becomes clear where today’s breakout comes from.

After a 4 week period, the euro has now completed what now looks to have been a classic (and to be honest one of the best examples I have ever seen in live markets) descending triangle. The consistent downtrend over the past few weeks has accompanied a consistent floor in the price at $1.2357. However this floor in the price has today been decisively broken to complete the pattern.

EURUSD   03122014

If you take a conservative downside target from the breakdown it gives you $1.2070. This is just 30 pips above the critical $1.2040 low that was posted at the time that Mario Draghi gave his “whatever it takes” speech. I have been a bear of EUR/USD for some time and I am happy to take this as a target, however the more boisterous traders there is also a bigger downside target at $1.1975.

It certainly now looks as though the Euro will be continuing lower. The big caveats near term come with the ECB monetary policy and press conference on Thursday, and of course Non-farm Payrolls on Friday. It is likely that both will be providing further downside pressure on the euro (ie. Draghi jawboning the euro lower and Payrolls coming in strongly) but there are still risks to this view, especially if the market is disappointed by a perceived lack of progress towards full blown QE.

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