- DXY reaches key decision point.
- Decisive breakout above 103.82 provides a new bullish signal.
- If no breakout, then likely retracement.
We start with the bigger picture monthly chart for the U.S. Dollar Index (DXY) as the longer-term price patterns can influence the shorter time frames. Let’s review the history briefly to provide some context for the current environment. DXY rallied into the 88.6 Fibonacci retracement in September, peaking at a trend high of 114.78.
The beginning of that uptrend began around February 2021 as the index flirted with support around the 200-month exponential moving average (EMA). That was the second successful test of the 200-month line as support and price eventually reversed higher. Being above the 200-month EMA is bullish and supportive of a continuation higher.
Weekly Chart - DXY Rising off Strong Support and Testing Key Pivot Zone
Shortening the time frame to a weekly chart, we can see that the recent swing low found support at the confluence of a couple Fibonacci levels and was shy of completing a 61.8% retracement.
Further, the 200-week EMA was tested successfully as support for the first time since the DXY went above it last in early-November 2021. This was a sign of the continuation of the uptrend.
Clearly, DXY has been strong recently as a series of higher weekly highs and higher weekly lows is present. This week the DXY has closed above the first dashed red line, which comes from the March 2020 swing high of 102.99 that led to a selloff. The next higher dotted red line is from the 103.82 January 2017 swing high.
They are included in the chart as the price levels were significant. A rise above 102.99 this week indicates strength, and a breakout above 103.82 will not only further confirm strength but also verify the breakout of the downtrend line. If reached, the DXY will be at a nine-week high and above a minor swing high at 103.57, showing strength.
DXY at Potential Resistance Zone
Nevertheless, the DXY is at a potential resistance level based on the downtrend line. As can be seen in the daily chart, it also completed a 78.6% Fibonacci retracement at 103.61 this week, a logical spot to start a retracement. Upward momentum remains strong however as the DXY pushes up against that potential resistance zone.
The DXY has also risen back above its 200-day EMA this week. Yet, it did that on each of the two prior approaches to the 200-day line and each failed, leading to a pullback. Might a similar scenario unfold again?
A long-term downtrend line is added to the daily chart. It marks a price area that when combined with the 103.82 horizontal further indicates the potential significance of the pivot zone. Either price breaks out above the higher trendline, or resistance is seen leading to a pullback.
Falling Wedge Pattern Could Lead to Another Retracement
There is a falling wedge pattern that has been developing recently. If it continues to evolve the natural direction from this week’s highs would be down. It is a pattern of consolidation that is descending and marked by two trendlines that are heading down and will cross in the future. Price tends to swing back and forth within a consolidation pattern.
If a retracement does occur prior to a breakout above 103.82, watch for potential support around the Fibonacci retracement levels. Note the 12-day EMA, which has started to define dynamic resistance of the near-term uptrend. It is now at 102.77 and a break below it points to further weakness.
On the Upside
On the upside, a daily close above 103.82 signals higher prices. The first two targets are from prior swing highs at 104.70, followed by 105.88. Nevertheless, a breakout above the long-term downtrend line could easily rally above 105.88 eventually.