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James Hyerczyk
US Dollar Index
US Dollar Index

With the Euro sitting near a two-year on Friday, I don’t expect the September U.S. Dollar Index to move much. Because of its weighting in the index, the Euro controls the direction.

We could see some volatility today after the European markets close because a few of the big banks controlling the long side will be gone for the week-end. Speaking of big banks, the word is that many went short into the ECB decision and Draghi press conference on Thursday so the rally we saw wasn’t only aggressive buying. There was a lot of short-covering.

These big traders were betting on Euro weakness and that the rally wouldn’t last. They were hoping that Draghi would attempt to talk down the currency since a sharply higher Euro could damage the still frail economy. They were right on the story, the ECB tried to weaken the Euro when they would apply more stimulus if the situation warranted it.

How much can the dollar index break? The Euro is more than 50% of the index and according to Deutsche Bank, it remains about 15 percent undervalued against the dollar on a purchasing parity basis, so there is plenty of room to the downside.

Daily September U.S. Dollar Index

Technical Analysis

The main trend is down according to the daily swing chart. However, the index is down eight days from its most recent top, putting the market in the window of time for a potentially bullish closing price reversal bottom.

The index is currently straddling an old bottom at 93.97. The nearest downside target is the August 18, 2016 main top at 93.58. The nearest upside target is an old bottom at 94.55.

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Forecast

The index has been walking down a steep downtrending angle from the 95.960 top at 93.96 today. Trader reaction to this angle will determine the direction of the index today.

A sustained move over 95.96 will indicate the presence of buyers. Overtaking yesterday’s close at 94.117 will put the index higher for the session and in a position to form a closing price reversal bottom.

A sustained move under 95.96 will signal the presence of sellers. This could lead to some late session selling pressure with the next target 93.58.

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