US Dollar Index Forecast December 17, 2012, Technical Analysis

The US Dollar Index fell during the session on Friday as the 80 level continues to offer a bit of resistance. However, we think that we are simply bouncing around in a bigger consolidation area between 79 and 80, and as such we think that this is going to be a fairly choppy trade going forward.

The next move will be predicated upon the so-called “fiscal cliff”, and whether or not a deal can be made in Washington DC. Because of this, we think this will be an extremely headline driven market, and as such think that it is probably going to be best avoided for the next couple of days until it becomes obvious as to which direction the talks are going.

From a technical point of view, if we managed to break down below the 79 handle, we think that this market could go much lower. In fact, that would be “good news”, as it would represent a “risk on” type of rally. If that happens, not only can you sell the US Dollar Index, but you can also start buying the Australian dollar, the New Zealand dollar, and the Canadian dollar.

However, even with this entire bearish outlook we would wait until a daily close below that 79 handle in order to consider it broken down. This is because this area is so “fact” with support that we would be remiss to simply take a breakout at the first sign of one. False breakouts are typically going to be most common around these types of areas, so we need some type of confirmation.

As for buying, we are very interested in buying this market if we can find some support fairly soon. That would more than likely have something to do with the fiscal talks in the United States Congress coming apart. That would certainly send a shot through the marketplace, and therefore a run to the US Treasuries, which of course are priced in US dollars. If that happens, expect a move to be brutal, although somewhat short-lived.