Since the end of June, the U.S. dollar Index has rallied 10 out of the last 12 weeks of trade. Optimism regarding the U.S. economy has accelerated on improving economic data and that has prompted many to move up their forecasts on when the Fed will raise interest rates.
Today’s economic data was mixed as Empire State Manufacturing Index printed at 27.5, much higher than the prior 14.7 reading, and Industrial Production had a poor reading of -0.1% and a downward revision for the previous reading to 0.2% from 0.4%.
All eyes will be on the Fed on Wednesday. The expectations are for no changes with the Federal Funds Rate but everyone will pay close attention but to whether they signal rate hike might occur during the first half of 2015. If the Fed remains with a wait and see approach, we may see a significant dollar reversal.
Price action on U.S. dollar index the weekly chart shows that the bullish rally starting this summer accelerated its gains once it invalidated the potential bearish butterfly pattern. Now price may form a double top pattern that could potentially trigger a reversal towards the 83.00 area. If bullishness returns and has two daily closes above the 85.00 handle, the double top pattern may be invalidated and further upside could target 87.50
The trade: Sell Dollar Index at 84.55 with a stop loss at 85.10 and a take profit at 83.10. The Risk/Reward Ratio is almost 1:3.
Edward J. Moya
WorldWideMarkets Online Trading