US Dollar Index Forecast December 24, 2012, Technical Analysis

The US Dollar Index rose during the session on Friday as the “risk off” trade comes back into play. There a lot of fears coming out of the talks going on in Washington DC right now and as a result people were taking risk out of the market. Also, the two hammers that formed above the 79 handle on Wednesday and Thursday suggested that we were going to go higher. Obviously, we have and it now looks like we may make a move back towards the 80 level.

The US Dollar Index might be a little bit ill liquid over the next several sessions, as Monday is an abbreviated session while Tuesday as Christmas Day. The volumes will not be there, and as a result we could see erratic movements. It will be a very difficult market to trade during this time period, and it is suggested that perhaps you look into the spot Forex markets.

You have to remember that the index is heavily weighted in favor of the EUR/USD pair, and the Euro makes up 40% of the market. With this in mind, you can use this pair in the spot markets in order to trade the US Dollar Index as it generally will move in the same direction. The biggest problem that you will have to contend with is the fact that you may get gapping and very wide spreads in this market, as opposed to trading in the spot Forex market which of course features banks and large funds from around the world don’t necessarily celebrate Christmas.

With all this being said, the week of Christmas is one of the worst trading weeks of the year. It isn’t that you can’t make money this week; it’s just that you will have several markets close on and off over the first couple of days, and volume will be thinner in almost every market available. Because of this, many traders will simply be taking the week off and won’t return until after New Year’s Day. We will however monitor the markets and wait to see if some type of announcement out of Washington DC during the so-called “fiscal cliff” talks moves the markets.