What s next for bruised dollar bulls

The white-knuckle roller coaster ride that is this week’s markets continues today. Equities rallied across the board, with European indices rising 3+% and US bourses tracking about 1% higher as of writing. Yields in the US, UK, Germany, and Japan are all ticking higher today, showing modest selling of safe-haven bonds across the globe (this same sentiment is reflected in gold’s lackluster trade today). Meanwhile, oil prices have exploded higher today, with the benchmark WTI contract exploding higher by over three points, or nearly 9%, on the day.

So with oil and stocks surging and bonds falling, surely we’d expect the dollar to be on the back foot as well? Well, no; in fact, the dollar index is actually trading up about 0.5% on the day, after a big gain yesterday as well. In many ways, today’s (and yesterday’s) price action is merely unwinding some of the panic-driven moves we saw earlier this week. In that context, it’s not surprising to see the dollar rally sharply in an attempt to dig itself out of its recent hole.

Taking a step back reveals another reason why the dollar has seen a short-term bounce: the pair found a floor directly at previous support in the 93.50-94.00 range. This zone has consistently marked near-term bottoms in the index since early February, so it’s not surprising that bulls stepped in to defend that level once again. Looking beyond the price action itself, there were deep oversold readings in both the Bollinger Bands (price below the lower 2sd band) and RSI indicator (below 30). Given the previous support level and clear oversold readings, the recent rally in the greenback can be chalked up to nothing more than an oversold bounce thus far.

So what are the key levels to watch in the dollar index (and by extension, EUR/USD) moving forward? To the topside, the key level to watch will be in the 98.00-98.50 zone, which has served as resistance for the past four months. Only if price can break that key barrier will bulls feel comfortable declaring that the uptrend has resumed.

For now, the US dollar remains trapped in a sideways range against its major rivals as traders try to decipher the Fed’s intentions…and whether a rate hike would even be beneficial for the dollar.

Source: Stockcharts.com & City Index. Note that this chart does not yet reflect today’s price action; the dollar index is trading at 95.63 as of writing.

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