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Currency Market: US Dollar Index Consolidates After Two Weeks of Big Gains


The euro and commodity currencies have led the way lower, and the British pound could be next.

MINYANVILLE ORIGINAL The US Dollar Index has essentially traded sideways for the past week, which is probably healthy given the strong two-week rally since the beginning of May. This is hopefully building up some power for another leg higher, as we are less than a dollar away from new 52-week highs. Any move back below 81 is probably a good opportunity to add to winning long DX positions, and if this up trend is as strong as I think it could be, we might not see a 70 handle on the DX in a while. See the chart below.

The euro sell-off has clearly been the primary reason for US dollar strength, and it certainly doesn't look like things are going to get better in Europe any time soon. Although I would note that short positions are very high in the euro right now, so that could provide a little bit of support as it looks like the euro wants to test the 1.25 level. However, I want to remain focused on the bigger picture in this trade, and as you can see in the below weekly chart, this recent selloff in the euro is breaking major long term support. This would project the euro falling all the way down to the 1.10 level, which would closely coincide with my longer term target of trading back to parity (and possibly below) the US dollar.

The British pound has held up very well against the US dollar relatively, at least until it started to catch up on the downside last week. I think a British pound short position is now probably one of the better ways to get long the US dollar with a great near-term risk reward setup. I don't see the GBP getting back above 1.60 anytime soon, and it is now breaking below the 200-day around 1.58. I can easily see a longer-term target of 1.425 and possibly lower on the GBP, so it offers a pretty attractive risk reward short at current levels. I have personally covered some euro shorts and rolled those profits into GBP short positions, and you can see the 200-day moving average break below. Good luck out there!

Positions in British Pound futures, EURUSD, GBPUSD, USDCAD, GBPJPY, EURCAD, USDDKK
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