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US Dollar Index Rallies Into Resistance; Pullback or Consolidation Expected


The US Dollar Index is trending higher, and strength will be tested with 79 being the key level.

The US Dollar Index has rallied right into the 79 to 80 resistance level I mentioned here last week (see US Dollar Index Continues Higher, Especially Against Commodity Currencies), and a pause here below the early October high is expected.

I think we will be able to tell a lot about the nature of this market by observing how it reacts to this resistance level. If the dollar index is able to hold above 79 (the 200-week moving average), then it might be in a stronger uptrend and break above 80 quickly.

Otherwise, a pullback to the 78 level which holds should be a good buying opportunity. Either way, the trend is clearly higher for the dollar index, and pullbacks to 78 should be used to add to winning long positions.

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The USDJPY cross has rallied right off the 77 support level, as it is looking more and more like the Japanese yen could be topping. I continue to like the risk-reward setup of the Japanese yen short here, even though the longer-term trend has still not turned. I think that could happen fairly soon though, as this USDJPY cross has started trending higher.

I think we will see it rally into the 79.50 level, where the 200-day moving average and Halloween Intervention Spike High will provide initial resistance. A confirmed top would be put in for the Japanese yen if you see the USDJPY cross close above 79.50, so I will be watching that level closely as we head into the end of the year.

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Another currency cross with an interesting trading setup at the moment is the EURGBP. The euro drastically outperformed the British pound from late 2007 into the heart of the financial crisis in late 2008 and early 2009. Since then, the euro has basically gone sideways. The shorter-term trends are clearly in favor of the British pound as capital has fled the euro.

Now it looks to me like the very long-term trend is starting to break down, which would bode for further euro weakness. As you can see in the below weekly chart, the EURGBP cross is breaking the 200-week moving average. I think this cross could easily trade to the 0.80 level, which would be the midpoint of the 50% and 61.8% Fibonacci retracement levels. Either way, I like the short-side risk-reward here in this cross as the euro remains under pressure.

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Hopefully as a reader you have been able to trade around some of these recent calls. I'll continue to keep you all up on what I am seeing in the currency markets. I hope everyone had a great Thanksgiving, and the markets should remain very interesting as we approach 2012.

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