Is this dollar rebound the start of a wider recovery?

The recent dollar resurgence has brought about some relief for a currency that endured a shocker of a 2017. Could this be the beginning of a long-term recovery for the greenback?

IG Analyst

Publication date : 2018-05-01T14:44:23+0100

Source: Bloomberg

The dollar has been storming the FX market over the past fortnight, as the previously unloved currency drives higher to the detriment of the likes of the euro, pound, and yen. With the US economy in a particularly strong position and the Federal Reserve (Fed) raising rates at a considerable clip there has long been reason to see the dollar appreciate. That being said, one key determinant of the DXY will be the direction of the euro, given how heavily weighted the dollar index is towards EUR/USD (57.6%).

From a technical perspective, the dollar index lost 15% in 2017, providing an extended bearish market sentiment that markets will find it difficult to shift out of in a hurry. However, looking below, the long-term picture provides a particularly interesting perspective. The monthly chart highlights that the weakness we have seen throughout 2017 was likely a retracement of the dollar rally, seen from the mid-2014 low to the start of 2017. With that perspective, we would want to see a recovery from the 61.8% or 76.4% Fibonacci retracements to build a bullish case. That is exactly what we are seeing, with the price moving higher since engaging with the 61.8% retracement. The confluence of that Fibonacci level alongside an ascending trendline and the 200-month moving average provides good reason to believe we could see a bounce from here.

DXY monthly chart

On the daily chart, we have clearly broken through in interesting descending trendline, that has dated back to the beginning of 2017. We are also seeing the price rally through the 200-day simple moving average (SMA) for the first time since breaking below the indicator a year ago. There are clear headwinds up ahead, with the possibility of a retracement only being negated with a break above the $94.93 mark. This requires a break through the $92.27 and $93.29 Fibonacci retracements in the meanwhile.

DXY daily chart

However, with the price having a significant recovery in the direction of the long-term prevailing trend, after engaging with a confluence of notable support, we are starting to see a bullish picture build for DXY. A break above $94.93 would be the strongest signal that we are seeing a turnaround. Despite this, with the price gathering pace to the upside, there is clearly a growing case for us to start seeing a more protracted period of upside for the greenback.

Is this dollar rebound the start of a wider recovery?

DXY monthly chart

DXY daily chart

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