A recipe for a US dollar correction is brewing, according to George Davis, Chief FIC Technical Analyst at RBC Capital Markets.
Drawing on an analysis of potential reversal patterns in EUR/USD, USDJPY, EUR/JPY and NZD/USD and cross asset developments between the USD and gold, Davis thinks a dollar correction is on the cards and a short EUR/USD trade opportunity has arisen. His reasons include:
1. Davis points out that the US Dollar Index (DXY) formed a bullish key reversal day last Friday against the 2018 low at 88.44 (see Chart 1). He says this level must hold for the bullish pattern to remain valid. If DXY can close above 90.57, a double bottom pattern would be confirmed with a price objective of around 92.70.
2. The above move has been corroborated by a bearish key reversal day in gold, which typically has a negative correlation with the USD (see Chart 2); a daily close below 1325 would trigger a bearish trend reversal for gold, with 1306 the next target.
3. Bearish key reversal days have also led to the formation of a triple top in EURUSD, at 1.2537 (see Chart 3). The next target for the bearish trend would be 1.2206, below which the triple top pattern would be confirmed and trigger a new target of around 1.1875. Further evidence for an impending correction comes from a series of bearish divergence with the RSI.
4. A hammer candlestick formed against the low of the year for USDJPY and 105.55 must now hold in order for the bullish reversal pattern to hold (see Chart 4). Similarly, a triple top has stalled the advance in NZDUSD (see Chart 5). Bullish and bearish divergences have appeared on both charts respectively.
As such, Davis thinks EURUSD will move toward 1.1900, though a move above 1.2540 (the cycle high and double top) would negate this view.