US Dollar likely to increase another 5%

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Follow the money
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The US Dollar Index had a great week, as it finally crossed above the 94.50 level. This is a level that had been important several times, so this breakout is something worth watching. After all, if you get the US dollar right, you tend to get the Forex markets right. The implications of this breakout could eb rather big, so as this happened, I had to change my overall approach to the markets.

The EUR/USD is now near the 1.1450 level, which makes sense as it is by far the most influential currency for the Index. With this, the focus will now be about shorting other currencies against the greenback. This is also something that we need to pay attention to: the yields in the US bond markets. They continue to rise, so this continues to force money into the currency.

Central banks diverge

One mistake that a lot of retail traders make is they never seem to ask about the macro picture. The central banks around the world have made headlines, and the dust is settling in favor of the USD. The Federal Reserve has started to taper it bond buying program, which is tightening – albeit very slightly. The Bank of England has decided not to taper its bond buying program, just as the Reserve Bank of Australia has done. Both the GBP and the AUD have suffered as a result. Canada might be a bit of an outlier, but this is probably more to do with oil than anything else. The USD/CAD only recently rallied, but it seems to have a bit of a ceiling above.

The ‘measured move.’

Below, I have the chart of the US Dollar Index. You can see that the 50 day EMA has recently crossed the 200 day EMA, known as a “Golden Cross.” This is a very bullish indication, and was the first sign that we might finally be ready to break out. The 94.50 level being broken was a big event, and you can see we had exited a large “W pattern.” The measured move is shown on the chart, suggesting that we could rise to the 99.50 level.

Chart of US Dollar Index daily time frame.
US Dollar Index breakout

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