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Currency Market: US Dollar Index Forming a Top


A head-and-shoulders pattern along with heavy resistance at 80 should weigh on the US dollar.

The US Dollar Index is forming a head and shoulders topping pattern, and I think this is a clear signal that the DX is headed for a test of the mid 70s. With the DX trading just below 80, upside risk is only to the 200-day moving average around the 81 level, and a close below 79 will confirm a downside target to 75 or even lower. So there is a very nice risk-reward setup in a US Dollar Index short position at current levels. As you can see in the 2-year chart below of the US Dollar Index, below 79 there is not much support in the DX until the 2011 lows near 74. At least a weak US dollar could bode well for risk!

Click to enlarge

Gold should continue to benefit from the backdrop of a weakening US dollar, and I continue to think there is a great risk-reward setup in this market as well. Gold has basically consolidated for 18 months, and has established some solid support at 1650 and the 200-day moving average around 1664. As I mentioned a couple weeks ago, I think once gold is able to clear the 1700 resistance level, it will be a clear shot to 2000 and potentially higher. Therefore long positions in gold at current levels below 1700 make a lot of sense to me with a very nice risk-reward setup. See the Launchpad below.

Click to enlarge

The Australian dollar also has an interesting risk-reward setup at current levels, and clearly if the US dollar weakens and gold starts to act well, then the Australian dollar could be in the sweet spot. This commodity currency has a solid base of support at the 200-day moving average around the 1.03 level on the AUDUSD cross. Upside potential is wide open to 1.10, and the risk-reward here below the 1.04 level makes a lot of sense. You can see the setup in the one year chart below.

Click to enlarge

Good luck out there!

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Positions in gold futures, Australian dollar futures.
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