With European yields likely to remain lower, demand for European bonds may fall and some investors will park their funds with US bonds. This steady inflow of money towards the U.S. should provide a solid backdrop for the dollar to maintain a decent bid this summer. A longer-term bet on the US dollar might require a good amount of patience over the next couple of months.
Three weeks ago, I wrote how the Dollar Index (DXC) began a strong rally after hitting a major support zone (the 2013 October low) and forming a double-bottom pattern at the 79.00 handle. The trend line break to the upside did have a strong thrust that did eventually form a bearish ABCD pattern at 81.07. The pullback however was short-lived and we may now be poised for the next move higher.
The daily chart shown above highlights a clear path towards 81.50 if price is able to recapture the 81.00 handle. Further upside may eventually target the 84.25 level. Key support will come from the 200-day Simple Moving Average (SMA) which is currently trading at 80.44. It will take a major event in order for the 80.00 price barrier to be taken out.
The trade: Buy Dollar Index at 80.87 with a stop loss at 80.47 and a take profit at 81.47. The Risk/Reward Ratio is 2:3.
Edward J. Moya
WorldWideMarkets Online Trading