The USD Rallies. Is the Major Uptrend Back Underway?

usd index

Since Monday, August 24, the EURUSD has fallen from a recent high of 1.17165 to 1.1236 (as of 9 AM EST, August 27). That’s a 4% drop in the euro, a 4% pop in the USD, and it’s significant for a number of reasons.

The mid-August triangle breakout in the EURUSD reached the target of 1.16 to 1.1650 (showing euro strength up to that point). Targets are not necessarily reversal points, but rather price points where the odds of a further move in that direction are starting to diminish. The price overshot the target, and then quickly pulled back over a volatile few days.

Zoom out a bit on a EURUSD daily chart; while the pair did breakout of a triangle pattern, there is also a larger range in play. Since May the price is moving between support at 1.0808 and resistance at 1.1467. With the EURUSD in pull retreat the last few sessions there is a very real possibility that the upside breakout of the range (rally above 1.1467) was false.  If that’s the case, we could be heading back to the original triangle breakout price at 1.1050, or even range support.

eurusd false breakout

Figure 1. EURUSD Daily Chart

The strength in the USD isn’t just against the EUR. The GBPUSD has also taken a tumble, first breaking a range to the upside (false breakout) and now the downside. A continued slide below 1.5330 means the rally could be over for the GBP, and the USD rally may be picking up steam. A move back inside the range though indicates the GBP is stable for now, and could even rise back toward the top of the range (USD decline) in the 1.56/1.57 region.

GBPUSD false breakout

Figure 2. GBPUSD Daily Chart

The USDCAD rally still remains in effect, so the USD uptrend hasn’t been in question since the April pullback. Same with the NZD; it’s downtrend against the USD has been relentless since April. The USD has been in an uptrend against the AUD since May (AUDUSD downtrend).

The USDCHF is a bit of a wild card as it is moving in a narrowing range since the January price shock. It too bounced off support on August 24 and is rallying (USD) since (CHF decline).

The USDJPY also bounced off support just above 1.16, which was the low of a range in late 2014. the decline was very steep for the USD though, so a full recovery to 125 or higher may not be in the cards, but a short-term rally (USD) into the 122/123 is quite possible.

usdjpy bounce off support

Figure 3. USDJPY Daily Chart

The Dollar Index Helps Clarify

With major pairs all showing current US dollar strength, is the USD long-term uptrend back underway? For forex traders, the USD dollar uptrend never ended against currencies  like the AUD, NZD, CAD and MXN.

The USD needs to see a lot more strength versus the EUR and JPY though in order to reverse the decline seen in the USD. The false upside EUR break and the USD bouncing off support against the JPY indicates it could happen, but it isn’t a given.

The US Dollar Index Futures (DX) highlight where the USD is relative to a basket of currencies. After the rally of the last few days it is right in the middle of a range it’s been in since May.

usd index

Figure 4. December 2015 USD Index Futures – Daily Chart

Keep an eye on that chart to monitor overall strength and trend direction in the USD. If the USD breaks below the range, it indicates a longer term shift is likely to develop in most forex pairs, where the USD falls and the other currency rallies. If the dollar index continues to rally, it is bullish for the USD and bearish for currency being traded against it.