Break down on the US Dollar index
The USD equally-weighted index has broken past its month-long range area. This type of price action must be closely monitored heading into Friday as going forward it may represent a major inflection point and shift in behavior for both the US Dollar and as a consequence, in the overall volatility of the Forex market.
The chart below illustrates the narrow consolidation the US Dollar has been subject to since the sharp decline back in May. Ever since, that depreciation in the value of the US Dollar led to a period of waxing and waning with neutrality in positioning and market makers dominating proceedings at the edges.
The market, ever since, has clearly pin ponged between a huge line of support and overhead resistance. But as the last daily candle close shows, such dynamic has now changed (judging by the daily price action) as sellers no longer engaged at the resistance on the back of the first higher low for the USD in months.
By drilling down into the granularity of session by session flows, as illustrated below, one can also find further evidence of this bullish shift occurring by the rotation to bullish territory in my prop metrics designed to measure the structural backdrop and the underlying momentum. They all align to the bullish side now.
The question in everyone’s mind now is. Can the US Dollar maintain these gains heading into the weekend? Much of the improvement in outlook and its sustainability in the short run will depend on the outcome of the US payrolls (22:30 AEST) where the consensus is for 664k net jobs.
What’s key, as it always is, will be to deduce through price action what the ‘real’ market intentions are. Clues over the intent in future market positioning can be deciphered by analyzing the type of behavior seen by the US Dollar and how that relates to the US data. Initially, movement seen will be a function of the deviation between estimates and actual data, how the US Dollar behaves on the aftermath will be a real teller.
Let’s now shift gears to look into other indicators of future behavior in the US Dollar. For that, I’ve run a time-based analysis of the USD index (equally-weighted) and I managed to identify a clear 145-day cycle that meets all the criteria in terms of past amplitudes, strength and accuracy rate.
The chart below, courtesy of the cycle scanner software designed by Lars Von Thienen, shows that the USD is entering the late stages of its downward cycle and the rhythmic pattern is set to start shifting soon. A departure off the bottom around this time that results in months of USD outperformance may be in store.
Besides, the SP500, which tends to have a solid negative correlation with the USD, looks like is also topping judging by time-based cycle analytics. In the chart below I demonstrate the the S&P 500 has a very strong 171 day & 357 day cycle as a composite line. The peaks of both cycles are currently in line so we can expect downward pressure on the SP500 until late August. Analysis on sentiment indicators and all other major indices paint a similar picture.