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The Dollar Index Is At A Crucial Level

Via Dana Lyons' Tumblr,

The U.S. Dollar is testing the breakout point of its 20-month trading range.

On an Inauguration Day in which the overriding theme of the incoming President’s speech was one of protectionism, it was fitting that the Chart Of The Day dealt with the U.S. Dollar protecting its own chart “turf”. Following the Dollar’s explosive rally from 2014 to 2015, it settled into a 20-month consolidation. In the case of the Dollar Index (DXY), this relatively tight range stretched from roughly 92.5 to 100.5. In the frenzied post-election action in the financial markets, the DXY was finally able to break out above the top of its range. And after a brief test of the 100.5 breakout area in early December, the DXY traded as high as 103.82.

In recent weeks, however, we have seen it pull back to where it is once again presently testing the 100.5 breakout level.

 

Many folks, including ourselves, have surmised that the 20-month trading range was likely just a digestion of the 2014-2015 rally and would put the Dollar into position to launch its next leg higher. For that theory to be correct, holding this breakout area may be crucial. Should the DXY indeed be successful at holding this level, a longer-term, more significant up-leg is certainly in play.

Of course, if the DXY fails to hold its breakout level, then a “false breakout” is the focus. And the downside potential following a false breakout could be considerable. Either way, a lot could be riding on this test right here in the Dollar.

Additionally, over the years, we have learned to judge each security and asset on its own merits. That is, the practice of “inter-market”, derivative analysis, or directing one’s investment in an asset based on the movement of another is vastly overrated. That said, if there is one asset that wields more influence over the behavior of others, it is likely the Dollar. Therefore, if one can correctly analyze the path of the Dollar, they have a decent shot at getting other assets right.

And that reality makes this current test that much more consequential. 

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