US Dollar Index Trapped

Dec 13, 2007: 8:41 PM CST

I was a bit surprised that there wasn’t a more negative reaction in the US Dollar Index as a result of the Federal Reserve’s decision to cut interest rates by .25 bps.

Typically, with lower interest rates, countries can expect their monetary indexes to be lower as a result of lower demand from foreign nations to own denominated assets in the country, especially when other currencies are yielding higher rates.

Nevertheless, the Dollar Index simply shrugged off the most recent fundamental development from the Fed and barely batted an eye.

In fact, the Index is in the middle of an upswing on both the daily and weekly charts.

Weekly:

The index is in the middle of a normal bear market correction, which is projected to take price to the $78 range, or a few percent higher before we can expect resistance to overtake supply.

Nothing can go down forever.

In the daily chart, the Dollar Index is trapped:

A positive momentum divergence has been resolved peacefully to the upside, and price is above the 20 period moving average for the first time since a brief head-fake above it in August.

Price is finding support at the 20 and resistance at the 50 (blue line). We are seeing consolidation at the moment, which is logical given the large volatility down-swing in price.

The orange square corresponds with the falling 20 period moving average on the Weekly Chart, and if the higher forces that are trading off the weekly chart deem it appropriate, then we should see at least a retest of that area.

There may be genuine supply at that level to drive price lower, but conditions are not yet safe to ‘short’ the Dollar Futures or other FOREX related vehicle.

Either way, the trend is still down and so any surprises can still be expected to occur to the downside.

I’d like to see a few closes above the daily 50 period moving average to get very bullish on the Dollar.

 

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