US Dollar Index forecast for the week of December 24, 2012, Technical Analysis

The US Dollar Index fell during a majority of the week of the last five sessions, but found support at the 79 handle. The 79 level looks to be the beginning of a major support zone all the way down to the 78 handle, and as a result we think that we are at a very important juncture on the weekly chart right now.

It should be noted however, we did manage to stick any of the losses, and in fact formed a hammer. This is a very bullish sign, and it looks like the market is trying to bounce higher here, and of course this would make sense as the “risk off trade” could come back into focus.

You do have to remember that the upcoming week will be very illiquid as Monday will have an abbreviated session, while Tuesday is Christmas Day. Because of this, we think that the next several sessions could be very volatile as the volume simply will not be there. With this being said however, it does look like the Dollar will get a bit of a bid going forward.

One of the best ways to play the US dollar over the next 10 days or so likely be in the spot Forex markets. This is because you have the advantage of a worldwide market, as opposed to one that is typically US centric like the US Dollar Index futures. Certainly, there will be plenty of banks out there that will pay very little attention to the idea of Christmas, as you have players from Japan, the Muslim world, and the Hindu world. Because of this, if you feel the need to trade the US dollar, you will more than likely be better served in that spot market.

Obviously, you cannot trade the basket of currencies like you can in this contract, but you can trade against specific currencies such as the Euro. The Euro looks a bit overextended, and it is 40% of the US Dollar Index, so if you believe that there will be Dollar strength coming forward as this chart suggests, perhaps you can short the EUR/USD pair as a proxy.