US dollar on verge of massive breakout

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While most traders and pundits have been shouting for the demise of the US dollar, the reality has been quite different as of late. This has been a perfect example of “trade what you see, not what you hear.” The United States is still by far the “cleanest shirt in the dirty laundry”, and as we see a lot of potential concerns around the world, the financial community always returns to the greenback.

Yes, there will be plenty of people that cheer on the demise of the dollar, but they never really seem to be able to answer one simple question: “What replaces it?” Bitcoin? Chinese yuan? Euro? All of these have serious issues attached to them, and they aren’t going away. I believe that we are about to see another major shift in the attitude of traders, as the concerns of the delta variant continue, the Chinese GDP numbers fall, and of course places like Australia continue to lock themselves down – despite almost no deaths from C-19.

US Dollar Index Technicals

When you look at the US Dollar Index, you can clearly see that over the years, the market has essentially been dancing between the 90 and 102 levels. This has been the cast since 2015, and at this point I believe the market is about to try to return to that norm. As you can see, the last several months had seen selling, but we are building on a massive bounce from that level last month, and are challenging a major downtrend line. Furthermore, bond yields in America are falling, meaning that people are looking for safety – and that safety requires US dollar purchases.

US Dollar Index monthly chart
US Dollar Index monthly chart

This becomes even more apparent when you look at the weekly charts. In fact, I find it very interesting that we formed a pinbar/shooting star at the trend line last week, only to turn around and take most of that real estate back. This suggests continued upward pressure. It also coincides nicely with the drop in 10 Year Note yields, which are below 1.3%, in comparison to 0.3% in Germany. (The ECB is almost the sole buyer of bonds in the EU at the moment.) With this in mind, I think the market is certainly on the precipice of a bigger move. It only needs a “push” at this point.

US Dollar Index weekly chart

At this point, the US Dollar Index chart is the most important one in the world – right along with the 10 Year Note. Once we get the breakout above the trend line – assuming it happens – this could lead to a massive move higher. At that point, I would anticipate we could go looking towards a few levels right away, with the breaking of the 93 level kicking it off. I believe these levels above could include the aforementioned 93, followed by 95, 98, and even 100 in a rapid succession. I will be watching this chart closely.

If this breakout happens, I suspect the following levels could be seen:

  • EUR/USD 1.16
  • GBP/USD 1.35
  • AUD/USD 0.7050
  • USD/CAD 1.30
  • Gold $1680

Regardless, the real risk is to the downside for risk assets at this point. I am not calling for Armageddon, just that the charts are starting to line up for a bit of fear.

Chris

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