FX Update: Employing The Dollar Index As A Timing Tool

This post follows nicely on from my fundamental perspective on the USD (FX Update: Are we still smiling at the dollar?) in which I argued that the cyclical view of the dollar remains dollar-negative.

Despite any potential dollar strength that could be in store for the coming days - should today's release of the Federal Open Market Committee July minutes provide the markets with additional "hawkish hints" on the tapering path - the broader technical picture still remains dollar negative and a radical up-move in the dollar is needed to change this.

Having covered the dollar from a fundamental perspective, below is a snapshot technical view of the DXY index (the Dollar index, traded as a Futures contract). I decided to cover this index as it neatly paints a generalised picture of dollar moves and can be used as a timing tool for trading the main USD-crosses.

While my view of the dollar index is bearish right now, below I also highlight key EURUSD downside levels and patterns - a break below which would work to alter the dollar-bearish picture.

Dollar index technical view
The DXY index broke yesterday below trend-line support coming in from late August 2011. It however managed to close above this said trend-line support.

Despite this close, the overall trend still remains bearish for the index. In the near term, a close below the above referred to trend line, presently at the 80.93 level, and the neckline confirmation support at 80.61, would give scope for accelerated downside and confirmation of the downtrend continuation pattern. Such a continuation pattern would allow for a test of support at 80.00 and 78.92, and further down the double top technical target of 76.29.

In terms of EURUSD downside, a daily close below the 1.3180-90 zone would be needed to start evaluating dollar reversal sentiment. The technical base pattern in the 1.2745-55 zone, which we last covered here gives the broad technical picture in EURUSD a bullish tone and this will remain intact as long as the base pattern is in place.

Note: EUR has a 57.6 percent weighting in the DXY index.

DXY index at multi-month lows