Tuesday, August 1, 2017

USD US Dollar Index Weekly and Daily Charts

Keystone posted the USD daily chart last week that was hinting at a recovery due to the positive divergence and oversold conditions but the caveat was the Federal Reserve meeting on Wednesday, 7/26/17. Even with a potential bounce, the weekly chart remained weak so any bounce was expected to fail with new lower lows on the way in the weekly time frame. As it played out, the Fed is backing slightly away from its rate hiking plans (although the FOMC officially expects to implement one more rate hike this year) which dropped the dollar like a stone. The economic data in Europe is generally meeting or beating expectations so the euro rises exacerbating the drop in the dollar (the euro and dollar currency baskets contain large amounts of each other's currency so the two indexes move inversely to one another).

In addition, the daily theatrics and drama at the Whitehouse creates dollar weakness. The dollar collapses and the projection for a quick and short recovery rally (blue lines) immediately falls by the wayside. Price plummets to a 92-handle and rides the lower standard deviation band lower. Since the lower band is violated, a move back to the middle band at 94.65, and falling, at a minimum, is on the table.

Technical damage occurs with the drop creating a much weaker environment for the dollar index. The indicators are mixed on both charts. On the daily chart, the RSI is oversold agreeable to a bounce. Ditto the oversold stochastics with positive divergence. The histogram is also positively diverged wanting price to recover. The MACD line and ROC, however, are weak and bleak wanting lower lows in USD after any bounce occurs in the daily time frame.

On the weekly chart, lower lows occur as was expected. What was not expected was the bottom falling out in the dollar. In the last month, price falls from a 96-handle to a 92-handle. Central bankers are not as concerned about actual values of indexes and data as much as the velocity or rate of the moves and the dollar and euro sharp moves, lower and higher, respectively, creates angst with Fed Chair Yellen and ECB President Draghi, respectively.

The 2-1/2 year sideways channel at 92-ish to 100-ish remains in play. The critical 200-week MA is at 92.36 which acts as support. Price came down to 92.64 to take an initial look. This confluence of the lower channel line and 200-week MA is a line in the sand. The dollar will bounce or die from this 92-ish level as August plays out.

The stochastics on the weekly chart are oversold and agreeable to a bounce occurring in the weekly time frame even if it is a dead-cat bounce. The RSI is also oversold agreeable to a bounce but a lower low occurs wanting price to come back down after any bounce would occur in this weekly time frame. The MACD and ROC lines are weak and bleak wanting lower lows after any bounce occurs in the weekly time frame. The action in the dollar may become choppy sideways in this 92-93 area over the coming days and week or three.

The expectation is for choppy sideways action at 92.0-94.5 for early and mid-August. The European Central Bank and specifically, President Draghi, holds the key for the move in the dollar going forward. Draghi did not appear overly concerned that the euro was rising (due to falling dollar) but the stage may have lost a great actor when he went to work at the ECB. Draghi is likely losing sleep every night over the higher euro since it will hurt stock prices across the pond going forward.

Super Mario speaks at Jackson Hole which is coming fast at 8/24/17 through 8/26/17. Draghi's words from Wyoming will dictate whether the US dollar collapses from the long-term sideways channel and 200-week MA, or, if it recovers higher staying within the safety of the sideways channel. Draghi may speak dovishly with the intent of weakening the euro to help European stocks which would send the US dollar index higher. The dollar and euro will likely chop sideways until Draghi takes the podium in scenic Wyoming within 25 days and extends his arm, like Julius Caesar in ancient Rome, turning a thumbs up or down for the euro, and the dollar will move inversely. 

Interestingly, the euro, $XEU, is at 1.18 and its 200-week MA is at 1.1789. The euro charts are basically the mirror image of the dollar charts above. Thus, the euro is first to test its 200-week MA resistance before the dollar tests its 200-week MA support. The high in the euro is 1.1846 which poked substantially above the 200-week MA but quickly retreats to rethink the potential breakout from 1.1789. The longer the euro remains above 1.1789, the more likely the dollar will keep dropping like a rock. If the euro retreats below 1.1789, spanked down from the 200-week, this opens the door to a relief rally for the USD. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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