Don't Get Too Bullish On The DXY!

Those who’ve been long the US dollar index (DXY) since the middle of last year have done well for themselves. The DXY has gained c. 12% from its January 2021 swing low of 89.21 to trade close to 99.75 at the time of writing. Making similar gains from current levels will undoubtedly prove more challenging. Traders should be factoring this into their risk-reward assessments going forward for several reasons.

First and foremost, as the DXY moves higher it’s likely to meet fierce resistance between the 100-103 range. In March 2020, dollar sellers were quick to step into the market when price attempted to breach the 103 level. Buyers may meet similar selling pressure on any re-attempt at these levels. Even more selling pressure is likely to arise toward the 103.8 level.

Second, from a market structure perspective the uptrend in the DXY is a lot more recent than appears to the naked eye. The 94.74 September 2020 swing high of the previous downtrend was only breached in November last year. This alone would not be concerning if it weren’t for a bit of RSI divergence between the latest two swing highs raises questions about further momentum.

Lastly, if indeed 99.418 represents the last true previous swing high and 97.685 the low in March, then traders are potentially facing a right-angled ascending broadening wedge pattern. Such a pattern adds a bit of ambiguity about further direction.

All that said, the DXY is clearly in an uptrend and the long US dollar positioning that drove the DXY higher earlier in the year has faded. So, there is still scope for a further rise in price. Nevertheless, traders should certainly be taking note of some of the red flags being thrown by the latest leg higher in the DXY.