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U.S. Dollar Index (DX) Futures Technical Analysis – Rally Should End Violently When Fed Closes Dollar Window

James Hyerczyk

The U.S. Dollar rallied across the board against a basket of major currencies on Thursday, as worries about the economic fallout from the coronavirus boosted dollar demand despite recent steps by world central banks aimed at alleviating market stress.

The greenback’s rally has driven several major currencies to multi-year lows. The Euro fell to its weakest level since April 2017, as traders dumped Euro positions in response to a fresh round of stimulus from the European Central Bank (ECB). The British Pound also plunged to a multi-year low as the Bank of England cut interest rates to 0.1% and ramped up its bond-buying program.

At 20:28 GMT, the June U.S. Dollar Index futures contract is trading at 103.530, up 1.987 or 1.96%.

Investors are selling what they can to keep their money in dollars due to the unprecedented amount of uncertainty caused by the coronavirus pandemic, which threatens to paralyze the global economy.

The U.S. Federal Reserve opened the taps for central banks in nine countries to access dollars in hopes of preventing the coronavirus outbreak from causing a global economic rout.

Daily Technical Analysis

The main trend is up according to the daily swing chart. The uptrend was reaffirmed on Thursday when buyers took out yesterday’s high.

The trend will change to down when sellers take out the last swing bottom at 94.530. This is not likely, but due to the prolonged rally in terms of price and time, the index is inside the window of time for a closing price reversal top. This chart pattern won’t change the trend to down, but it could trigger a 2 to 3 day correction.

The major, long-term retracement zone is 101.495 to 108.145. Closing above the 50% level at 101.495 makes this level support, which means the Fibonacci level at 108.145 is the primary upside target.

Daily Technical Forecast

Late Thursday, the June U.S. Dollar Index is in a position to close on the strong side of a steep uptrending Gann angle at 102.530. This angle is controlling the upside momentum, which at this time is 1.00 per day.

On Friday, this angle moves up to 103.530. In order to maintain the current upside momentum, the index is going to have to continue to trade above this angle.

If it continues to follow this angle then look for a test of the Fibonacci level at 108.145 on March 26 to March 27.

Holding above the 50% level at 101.495 is also a sign of strength. If it fails to hold this level then look for a sharp break into the next uptrending Gann angle at 98.530.

Side Notes

This rally is not about the economics of one country being stronger than another country, or for that matter, one country having higher rates than another country. It’s about liquidity.

Don’t get complacent playing the short-side. The dollar index could turn sharply lower and the Euro and British Pounds, for example, sharply higher as soon as the Federal Reserve Shuts off the taps providing dollars.

Be prepared for a violent move to the downside by the U.S. Dollar Index when the Fed pulls the plug on dollars.

This article was originally posted on FX Empire