Dollar Market Outlook: Is The Bottom In?

Dollar Outlook; Which Way Will It Go, George?

The Dollar Index has been trying to establish direction for a couple of weeks now and it may be on the verge of the next big move. At one point I was very bullish on the rebound but soon became less sanguine. Now, the index has more-or-less played out to my expectatation so figuring out the next move is crucial.

In bull camp, the U.S. economy is on track to rebound quite strongly from the pandemic. By strongly, I mean that most businesses will be able to survive, some will fall by the waysid, and by the end of the year things are going to be back to stable if not normal. At least in terms of economic activity. In the bear camp, the U.S. FOMC is still very dovish on the outlook and their forecast for interest rates and stimulus. This means super-easy policy in the near to mid-term if not an outright increase in the money supply.

Technically speaking, the index is moving lower and indicated lower but I’m not sure how much lower it will go from here. The indicators are pointing lower but are, in general, consistent with support at this level. If true, the index is likely to confirm in the next few trading days and that would result in bullish crossovers for the DXY. In this scenario, the DXY is forming a double-bottom as I write this and ready to make a larger reversal. The first hurdle is the short-term moving average. Once that is broken the index will be ready to move up to the $98.50 level.

Is support fails at the current level the index is likley to retest the $96.00 level again. As before, the indicators are pointing lower but consistent with support or at least a weakening bear trend so a deep move is not expected. Most likely, a touch to the $96.00 level would spark a new round of buying and short-covering that would set the index up for another bounce higher. The worst case scenario for the bulls would be a close below the $95.50 level followed by listless sideways trading. In that scenario the index could fall down to the $90-ish levels.