US Dollar Index Forecast December 18, 2012, Technical Analysis

The US Dollar Index fell during the session on Monday, continuing the weakness that we have seen since we broke down below the 80 handle. With this being said, we are presently in the center of a big consolidation area, and as such we don’t really have a trade lined up until we get below the 79 handle. Below there, we feel that this market will really start to fall apart as 79 has been such significant support in the past. However, if we see some type of supportive action between here and 79, we are more than willing to take a chance and go long of this market.

The value of the US dollar will continue to be driven by what’s going on with the congressional talks in Washington DC. As long as the so-called “fiscal cliff” can be avoided, it looks like the markets want to reenter the “risk on” mode, and of course selloff the US dollar. It also appears that the markets are trying to price in some type of deal between Congress and the President, and as such risk assets are starting to be bought in the markets.

As the markets are to feel better about the situation in DC, there is a real chance that the Dollar will be sold off quickly if there is some type of deal announced. Whether or not this could happen between now and the end of the year is a completely different story, however it does look more and more likely that there will be some type of compromise.

If this compromise does in fact happen, we expect the 79 level to be broken in short order, sending this market looking for the 76 handle over the course of the next month or two. Dollar weakness will probably be shown against most currencies around the world, and this particular market may be the way to take advantage of it. As for buying, we will not hesitate to buy supportive action between here and 79, as we think that a failure to break down in this market signals that we are going to bounce fairly significantly.