For two months, I’ve been watching the U.S. dollar form a consolidation pattern that I believe holds the key to understanding the greenback’s next major move. The dollar has been treading water for most of 2015 after a powerful bull market in 2014. The dollar’s bull market was one of the main triggers of the commodities bust that is still troubling global financial markets, which is why I am paying such close attention to it.
The U.S. Dollar Index is forming a wedge pattern that will likely result in another strong directional move when a breakout occurs. The dollar is still technically in a bull market, so there is a greater probability of a breakout to the upside versus the downside, but all scenarios must be considered. If the index breaks below its major support level at 93, a bearish signal would be given.
Source: Barchart.comThe prospect of even further dollar strength (in the event of a bullish breakout) is quite worrisome because of its implications for commodities prices and emerging markets, which suffer in a strong dollar environment. Many of the original factors that propelled the dollar higher in 2014 (U.S. monetary tightening combined with European and Japanese easing) are still present and may intensify in the near future.
Europe and Japan‘s economies are succumbing to deflationary forces once again, which means that an expansion of the ECB and BoJ’s stimulus programs are practically a done deal. Monetary stimulus programs in Europe and Japan lead to euro and yen weakness, which is bullish for the U.S. dollar in turn. A downside risk for the dollar, however, is one in which U.S. economic data unexpectedly weakens, putting Fed rate hikes on hold.
Source: http://www.forbes.com/sites/jessecolombo/2015/09/30/deciphering-the-dollars-next-move/
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