Our studies suggest that the US dollar exchange rate complex is on the cusp of changing trend from bullish to bearish.
Mixed U.S. data has led to mixed performance for the U.S. dollar over the course of the past 24 hours.
The greenback traded higher against commodity currencies, recovered earlier losses versus euro and sterling but weakened against the Japanese Yen.
Manufacturing activity in the Philadelphia region contracted in April, raising doubt about the sector's recovery.
The pound to dollar exchange rate was however unable to catch a bid following the Philly data as jobless claims data continued to improve, falling to its lowest level since 1973.
Continuing claims also dropped to a 15 year low, which is a sign of continued recovery in the labor market.
"However fewer job losses has not always translated into stronger job growth. Low jobless claims are encouraging but won't be enough to offset the drop in retail sales," says Kathy Lien at BK Asset Management.
The Outlook: Dollar Index at Risk of Turning Notably Lower
The Dollar Index (DXY) is a popularly cited measure of the US currency’s overall performance versus a whole basket of currencies.
The EUR/USD is the largest constituent of the basket with GBP/USD also offering a large weighting.
The DXY has formed a 'bearish looking' reversal pattern, which indicates the possibility of a major break lower into the 80s, on the horizon, from its current level in the 94s.
This suggests that those pairs in the basket, EUR/USD and GBP/USD included, could be looking to press higher.
The weekly chart shows a large 'double top' pattern forming since March 2015:
These patterns appear at the ends of up-trends and often signal a probable reversal of the trend.
They are composed of two peaks at a similar level. After the completion of the second peak the exchange rate moves back down and if it successfully breaks below the neckline situated at the lows of the trough between the two peaks, if triggers a break lower, to a down-target.
The target is calculated by taking the height of the pattern and extrapolating it down from the neckline. The price almost always reaches to 61.8% of the height of the pattern extrapolated down, which is the minimum expectation; normally it reaches 100%, sometimes even more.
The neckline on the Dollar Index is at 92.50, therefore the 61.8% minimum target, is at 87.61, given a height of 7.89, from the neckline to the 100.39 March 2015 highs.
A break below the 92.50 neckline is likely to reach 87.61.
If it continues lower, the next target is the 200-day moving average at 86.80, where it will almost certainly pause, followed by the 100% extrapolation of the height of the double top down, at 85.00.
The MACD indicator, in the bottom pane, has moved below its zero-line in the last week, signalling the onset of a bearish trend.
Further Forewarning from Surge in Precious Metals
The bearish reversal pattern on the dollar index is not the only sign that the dollar may be ending its up-cycle.
Further evidence comes from the bullish turn-around in the price of precious metals, which are highly inversely correlated with the dollar.
By "inversely correlated" we mean that when silver rises, the dollar tends to go down; and when silver falls, the dollar tends to go up.
The break higher in silver is therefore a bearish sign for the dollar. The fact that silver looks like it is probably reversing its long-term down-trend and has much higher to go, is a further longer-term bearish sign for the dollar, which back-ups the bearish pattern traced out across the dollar-indexes’ highs.
Fundamental Reasons Why the Dollar Could be About to Weaken
With most major commodities now appearing to have rallied off their cycle lows the outlook seems brighter for commodities in general.
If commodities rise it will have a general effect of raising prices globally, and therefore inflation.
If inflation reaches a materially higher level this could lead to more central banks seriously considering hiking interest rates.
So far the Federal Reserve has been ahead of most other central banks in raising interest rates, and this has benefited the dollar, however supposing commodities continue rallying, the dollar will no longer enjoy this advantage over other currencies, which could explain why the dollar index may be poised to break lower out of a double top reversal pattern.