Dollar and Euro Update – JenkinsRM

Dollar and Euro Update

Before I give a rundown on what I presently see happening with EURUSD, I’ll first touch on the US Dollar Index big picture because there is a big discrepancy between what’s happening on the long-term timeframe compared to the intermediate-term there.

The monthly chart below shows that although the cycle has remained high, the trend is still bullish.  The long-term bull trend of the US Dollar Index started in 2014 when the market broke above the dashed green line.  Any dips along the way were mostly higher lows.  However, in early 2018 the pullback in this long-term uptrend was deep enough to break below the bands (marked with a green ellipse) and had some nervous hands thinking about going short.  We said at the time that we needed to pay attention to the 200-period moving average laying just below the bands.

Dollar Index Monthly

This key level was able to support price and it started to rise again from here.  We actually got long in the area of the 200 MA and added to the position in early 2018 as price started breaking back above the lows marked with another dashed green line.  The long-term bullish trend for the Dollar Index remains intact and still above the 8-period moving average (yellow arrow).  I still believe the next move will be a rise in the Dollar Index, perhaps even retesting the late-2016 highs.

The weekly chart of the Dollar Index shows the key area of the 200 MA on the monthly chart was the same level of our Pi line on this timeframe (green ellipse).  The fact that the market held support at this level, after falling all the way from those late 2016 highs, was significant.

Dollar Index Weekly

Our traders know that when a market makes new highs and falls all the way back down to Pi, it’s simply not the time to start thinking about going short, as so many others were doing.  The timing is terrible and it’s too late in the move by then.

The support at Pi on the weekly timeframe was enough to swing the market around in the other direction; we liked being long on a break above the dashed red line, and the situation remains the same now.  The weekly cycle on the Dollar is back up this week and last, after making another higher low recently, so there are still a lot of reasons to be constructive on the Dollar.

The daily chart shows that the Dollar Index has been very choppy over the intermediate-term, which we’ll see better when we look at EURUSD in a moment.  I’ve marked the chart below with a series of green higher highs (HH) and higher lows (HL) to show the uptrend, and red lower highs (LH) and lower lows (LL) to show the downtrend.

Dollar Index Daily

We’ve just had the daily cycle turn down as we saw a lower low made last Friday.  The market is now trapped between the weekly higher lows of the long-term uptrend, and the lower high just made in the intermediate-term with the daily cycle rolling over last week.  The levels that matter the most now are the recent LH and LL, marking the top and bottom of the range respectively.

Turning now to EURUSD, we noted in a previous post how the market could not rally above the 200 MA on the longer-term timeframe at the same time the US Dollar Index was holding its 200 MA.  Indeed, the monthly cycle for EURUSD is quite low only the monthly chart which is the inverse of what we just saw with the Dollar Index.  On the weekly chart below, price is being supported by the 200 MA and this really shows where the battle with the Dollar will be.

EURUSD Weekly

Will EURUSD be able to rally off this level, get back above 1.15 and the bands?  If it does, it would be breaking what we call in our model the TMS, and it could possibly rally towards Pi much higher.  Or does the intermediate-term downtrend that’s been in place since last year win out?  Obviously, a break below 1.12 and a move below the 200 MA is bearish and all eyes would be focused on the 1.05 – 1.06 level.

Part of what we are seeing is the market possibly starting to price in a more dovish Fed.  Stocks finished the year very weak, which would back off the Dollar and rally the Euro.  However, data out of Europe last week was terrible and the region appears to be moving closer towards official recession.  We saw the market price this in particularly last Thursday after dovish comments from Draghi.  In answer to the question of who will emerge as being more dovish, the US or Europe, I believe the Dollar will win out since Europe is worse-off than the US.  However, there will no doubt be a lot of back and forth movement in the meantime.  On the downside, 1.13 defines the bottom of the risk range, while on the upside better sales to make are in the 1.15 area.

The daily chart shows the formation of swing line after an 8-9 day move down.  The area that I have circled is from late last week where it appeared that longs were capitulating into 1.13.  I believe that is also where a lot of people started to turn bearish and go short once we took out this low.

EURUSD Daily

What followed next was a bullish engulfing candle, breaking the swing line, and there is definitely room for further follow-through to the upside, probably to 1.15 or so.  Above 1.15 are two very important levels: our TMS level at 1.1550 and beyond that the whole number at 1.16.

I’m starting to lean core long EURUSD, which I must admit feels strange given that I’m so bearish on Europe in general.  But I also have EURJPY shorts so that is how I am expressing this bearishness.  I will look to come out of EURUSD longs on a move up near 1.15 and start to flip short again.

Here’s more in depth analysis in the video: