Frank Cappelleri, Chief Market Technician at Instinet, discusses the outlook for the US Dollar in four Dollar Index charts.
Chart 1 shows how the US Dollar has experienced a slow and essentially unchallenged uptrend since 2018, with a clear series of higher highs and higher lows. However, when the US Dollar made its first proper lower high in late November 2019, it marked a noticeable change in character and immediate downside followed through from that point.
Since mid December, the USD has been unable to get back above its 200-day moving average. In fact, it has traded below the 200-day moving average for 23 straight days so far, which is the longest streak since the 252 days from 12 May 2017 to 30 April 2018.
But unlike in 2016/17 when the topping pattern opened up the door to much further weakness, this time the USD has so far avoided disaster (see Chart 2).
And now, over the last few weeks, even though the Dollar has continued to trade below the 200-day moving average, it has formed a small – yet important – bullish inverse head-and-shoulders pattern.
Looked at another way, the USD is trying to rally after dipping below a long-term upward sloping channel. Declines have been short-lived since the middle of 2018, with the Dollar reversing higher after touching this trendline.
A lot is riding on the Dollar’s ability to leverage the bullish pattern in Chart 3. A failure would keep it under the 200-day moving average and put the channel (Chart 4) in jeopardy and increase the chances of renewed downside momentum.