Quadrant study of the USD Index – is it consolidating lower?

Looking at the USD index, it does appear to be consolidating, having said that, there has been strong USD buying of late. If we take the view that USD index is consolidating (correcting, going down) this means that the dollar will be making losses against Euro, Japanese yen, Pound, Swiss Franc, Aussie and Canadian dollar. My view is that if gains have already been made in any two of these currencies, but especially Euro and one other, gains which look like they are not likely to go much further, but the index is showing a clear pattern, it might be a sign to, in this case, sell the dollar against one of the other currencies, especially if that currency has been strong recently, for example, buy GBPUSD.

In other words, index seems to be going down, indicating short term dollar weakness (intraday). Euro and Japanese yen have already made gains against the dollar. These could continue to lead the index lower, but in case they seem to be stalling, or reversing, it might be worth looking for a reversal in the other pairs making up larger components of the index, particularly if those pairs have been posting losses against the dollar.

Here is the dollar index. Based on the post about quadrant trading the dollar index seems to be moving from the first sell quadrants (4 and 3) into the second sell quadrant (2). Could the index reach the bottom of quadrant (2)? It does not seem an unreasonable thought, especially given the confluence with the 61.8% fiboacci expansion.

The overall message here, is that the idea formed for the day on this basis, is that the dollar is in a weak (consolidation) position today.

It has made a new low, the SMA5 is turning down, the momentum of the SMA8 is slowing and there is a ‘double doji’ pattern (see the orange and pink triangles) which according to this very useful and thorough economics and trading blog post can be a warning of serious consolidation (sometimes).

 

To the upside, the two moving averages will act as resistance. To the downside, the selling of the USD is against the long term trend (turquoise line and purple lines).

In conclusion, the dollar index is a useful way to gauge the currency basket making up the index against the dollar. The immediate implication of the trend is weakness in those currencies against the US dollar (in an uptrend which we have clearly been in for months).

In the short term, there may be opportunities to sell the dollar down against other currencies.

 

Coming soon... signals every day. Pepperstone Group Limited

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