Following two weeks of solid gains for the US dollar, last week’s price action was an anomaly, given the sharp sell-off in risk assets which should have resulted in yet more gains for the greenback. Instead, the US dollar paused and perhaps the markets are now reflecting on the longer term implications of the Fed's bond buying programme. Indeed, as I mention in my recent book, A Three Dimensional Approach to Forex Trading, the bond market is now so polluted and distorted by the actions of all central banks, it is almost impossible to forecast with any degree of confidence the likely impact of such a withdrawal.
As an aside, this is also reflected in the once inverse relationship between gold (and other commodities) and the US dollar which has currently broken down. There are many reasons for this, not least the bond buying programme, lack of inflationary pressure, and the movement out of gold into higher risk assets. So, a confusing picture at best.
From a technical perspective on the daily chart, the US dollar paused last week between the 10,750 area to 10,870, and this now defines the short term support and resistance levels. Below, the deeper support platform is clearly delineated by the volume at price histogram with the green line at 10600, and the blue line below at 10400. The depth of volume in this price region is self evident, and this should provide a strong platform of support for any short term pullback.
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Moving to the weekly chart, this view is neatly summarised with a similar picture and also clearly signals last week’s doji candle, suggesting a market of indecision, and therefore do not be surprised to see the dollar index push lower, possibly back to test the 10700 price level or below in the short term.
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