The dollar extended a decline from a 20-year high, on lower than anticipated US economic data releases. The greenback slid on Friday after US consumer morale hit an all-time low, as measured by the consumer sentiment index. The reading of 50.0, missing the 50.2 forecasts, is the lowest level since the University of Michigan began compiling the data in November 1952.
Today, the dollar dropped further, and recession fears are the alleged culprit. However, that contradicts the market narrative that hopes inflation is peaking and recession can be averted as China is easing its recent COVID-19 lockdown restrictions.
Meanwhile, the dollar positively correlates with Treasuries, which have risen since Friday. Usually, the greenback and Treasury yields move in tandem. So, we see here a second market anomaly.
Let’s see what these contradictions look like on the chart.
Dollar Index Daily
The US currency has been trading within a pennant, a presumed continuation pattern. The expectation is that the price will break the range in the direction of its underlying trend after shorts have finished covering. However, the dollar fell to the lowest since June 16, below the range.
We are not quick to call it a blowout, which would mean that market dynamics should reverse pushing the dollar downward, as there was no decisive downside breakout. However, this weakness demonstrates weakness, both for the pattern as well as for the dollar. If we identify an obvious down move, we’ll look at the May low for support. A breach of that level could spell out a Double Top. For now, we are still bullish as the uptrend is intact, especially after the dollar registered a new high on June 13.
All this demonstrates a market that is unsure how to proceed. So, how do we proceed? The following guidelines can help you determine the best course of action based on your risk aversion.
should wait for a trend reconciliation with a new high or a double top.
would risk a long position with an upside breakout or a short with a double top.
could enter a long contrarian position, counting on the presumed inherent nature of the pennant and the bullish trend, especially from a risk-reward perspective, considering how close the price is to the bottom of the range. Here is a generic trade example:
Trade Sample – Aggressive Long Position:
- Entry: 104.00
- Stop-Loss: 103.75
- Risk: 25 pips
- Target: 108.00
- Reward: 400 pips
- Risk-Reward Ratio: 1:16