U.S. Dollar Index: Another Dead Cat Bounce?

“The former king of the currency markets is on a mission to reclaim the throne, appreciating against every single G10, most Asian and Emerging market currencies since the start of 2021.”

What is boosting the US Dollar?

A key theme stimulating appetite for the Dollar could be higher treasury yields.

It must be kept in mind that high yield bonds tend to attract foreign investors, which sell their local currency to buy the U.S Dollar in order to purchase the bonds. This results in the U.S Dollar appreciating against those currencies.

Bulls seem to also be deriving strength from the improving economic outlook. The prospects of more fiscal stimulus and vaccine rollouts continue to brighten the outlook for the largest economy in the world. Why wouldn’t you want to hold the currency of a country that could recover rapidly in 2021?

What could spoil the party?

“The great ‘reflation trade’ will most likely remain a thorn in the side of bulls.”

Reflation is a fiscal or monetary policy designed to expand economic output, stimulate spending, and curb the effects of deflation. Given how inflationary pressures may rise amid the jump in consumption, this may weaken the purchasing power of the Dollar. Another thing to keep in mind is that the Federal Reserve is keen to maintain its ultra-accommodative monetary stance into the foreseeable future. The combination of lower interest rates and rising inflationary pressures may throw a proverbial wrench in the works for bulls.

Enough of the fundamentals, let’s talk technicals

The basis of technical analysis is formed by Dow theory.

•  Prices are a comprehensive reflection of all market forces.
• Prices are repetitive, history will repeat itself.
•  Prices trend.

Taking a look at the Dollar Index on the weekly timeframe, we can see that prices are trending lower while history has repeated itself on numerous occasions with various pivotal levels.

The question that comes to mind is whether the current rebound is nothing more than a dead cat bounce. As the chart above illustrates, this is not the first time the Dollar has risen from the ashes like a phoenix…only to be smashed back down into the dirt.

If this rebound is the real deal, bulls will need a secure a solid weekly close above 92.00 which may signal the end of the downtrend. Above 92.00, the next key level of interest may be found at 95.00.

Things are looking spicy on the daily…

An inverse head and shoulders candlestick pattern can be identified on the daily charts.

The daily close above 90.50 could signal another leg up for the Dollar Index with 92.00 acting as the first and possible final destination for bulls before bears re-enter the scene.

Should 90.50 prove to be unreliable support, the Dollar Index may resume its descent into the abyss with 89.00 and 88.30 acting as the first of many bearish checkpoints.

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