Dollar Index – Can DXY Shed Light on the Path Ahead?

4 min read
HubertM

HubertM

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Dear Traders,

The USD has been flung hither and thither for an extended period of time now. This analysis will take a look at the Dollar Index to see if a predictable path can be spotted here.

DXY Completing Downtrend

The Dollar Index (DXY) is clearly in a medium-term downtrend. Its motive wave reveals are fairly clear internal structure. It tells us that it is finishing off the final stages of an entire 9-wave swing (if one counts the extensions of wave 3). To be specific, the recent ranging that the USD has exhibited appears to be Wave 4 of 5 of 5 (see daily chart above). This range within wave 4 is shaping up into a triangle potentially (see 4hour and 1 hour charts below) and reflects the extreme indecision all the major fx pairs have been in over the past months.

The strong USD sell-off over the last few days could be forming swing d of the dollar index triangle. So far it looks like swing d contains one 5-wave impulse (yellow a on below chart) and one ABC correction (yellow b). A zigzag would now require either another impulse or diagonal to form in order to complete triangle wave d.

Further USD Weakness To Be Expected

Overall this tells us that we may see further USD weakness during today’s trading, but which should then be followed by yet another USD recovery during wave E. This should be reflected by a further extension of the range of the major fx pairs.

However if a triangle is indeed forming in the DXY chart, it could indicate that a broader USD recovery is not going to happen just yet because the triangle is destined to break downwards in order to complete the final wave 5 of 5 of 5. A bigger USD recovery is therefore only on the horizon after the the post-triangle thrust is finished. This, in turn, may be an early indicator that at least some of the majors could post another new high against the USD. The EURUSD is heavily weighted in the DXY, so this is a likely candidate for another high. The USDJPY on the other hand could fail to post another low (USDJPY managed to rise yesterday even though DXY was falling).

All in all, a USD recovery is most likely coming, but it may take several more weeks before it begins.

All the best along your trading journey

Hubert

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