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What’s Next For Bruised Dollar Bulls?

What’s Next For Bruised Dollar Bulls?

The white-knuckle roller coaster ride that is this week’s markets continued on Thursday. Equities rallied across the board, with European indices rising 3+% and US bourses tracking about 1% higher as of writing. Yields in the US, UK, Germany and Japan all ticked higher, showing modest selling of safe-haven bonds across the globe (this same sentiment is reflected in gold’s lackluster trade). Meanwhile, oil prices exploded higher, with the benchmark WTI contract surging by over three points, or nearly 9%, on the day.

So, with oil and stocks surging and bonds falling, surely we’d expect the dollar to be on the back foot as well? Well, no. In fact, the dollar index was actually trading up about 0.5% on the day after a big gain on Wednesday as well. In many ways, Thursday’s and Wednesay’s price action is merely unwinding some of the panic-driven moves we saw earlier this week. In that context, it’s not surprising to see the dollar rally sharply in an attempt to dig itself out of its recent hole.

Taking a step back reveals another reason why the dollar has seen a short-term bounce: the pair found a floor directly at previous support in the 93.50-94.00 range. This zone has consistently marked near-term bottoms in the index since early February, so it’s not surprising that bulls stepped in to defend that level once again. Looking beyond the price action itself, there were deep oversold readings in both the Bollinger Bands® (price below the lower 2sd band) and RSI indicator (below 30). Given the previous support level and clear oversold readings, the recent rally in the greenback can be chalked up to nothing more than an oversold bounce thus far.

So what are the key levels to watch in the dollar index (and by extension, EUR/USD) moving forward? To the topside, the key level to watch will be in the 98.00-98.50 zone, which has served as resistance for the past four months. Only if price can break that key barrier will bulls feel comfortable declaring that the uptrend has resumed.

For now, the US dollar remains trapped in a sideways range against its major rivals as traders try to decipher the Fed’s intentions…and whether a rate hike would even be beneficial for the dollar.

The USD

Source: Stockcharts.com & FOREX.com. Note that this chart does not yet reflect Thursday’s price action; the dollar index is trading at 95.63 as of writing.

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