Greenback Poised for Breakdown?
Fundamentals
The Dollar Index continues to move higher, largely due to concerns over the Euro, but many have begun to question whether the currency will be able to maintain its upward momentum. The greenback has become the currency of choice by many investors recently due to the problems Europe is facing and the prospect of slower Chinese growth. It certainly seems as though the world may be entering a period of uncertainty, which suggests that investors may be staying in cash instead of taking on riskier investments. This certainly favors the US Dollar. If the mounting tension between North and South Korea comes to a boiling point, there may be a sense of panic in the market, which could further bolster the greenback. If on the other hand, we see a diplomatic solution to the tension on the Korean peninsula, the Dollar could find itself coming under some selling pressure. The same can be said if the EU can restore some confidence in the Euro. Some investors do not see this happening until the union forms a monetary fund to rescue distressed nations. If confidence in Europe and the global economy is restored, the Dollar could find itself facing immense pressure. The Fed has been extremely slow to raise interest rates, and the currencies of younger, faster growing economies like Brazil, Canada and Australia have all suffered severe depreciation versus the Dollar. This suggests that investors could quickly pounce on these currencies if the economic outlook improves.
Trading Ideas
The fundamental outlook for the Dollar Index remains a coin flip. The economic uncertainty facing the global economy favors the Dollar, due to its status as the world's reserve currency. Looking beyond the reserve currency status, the Dollar Index does not have much going for it fundamentally. Interest rates are low, and the economy is certainly not growing at an eye-popping rate. The chart shows the potential for a downside move. Some traders may wish to wait until the June contract confirms a downside breakout below 85.30 before entering into a short futures position.
Technicals
Turning to the chart, we see the June Dollar Index forming what could potentially turn into a double-top formation. Some traders may be a bit cautious approaching the pattern, as the chart has already had one false double-top signal in mid-April before the rally really picked up steam. The RSI is showing overbought readings, suggesting some bearish pressure. The June contract continues to trade well above the major moving averages, and the other oscillators are fairly neutral.
Robert Kurzatkowski, Trading Specialist
