Sandwiched awkwardly between Germany to the south and Sweden and Norway to the north, Denmark is an often overlooked economy on the global stage. However, traders would be mistaken to overlook the potential offered by its currency, the Danish krone (DKK), which just saw a major breakout that could lead to a multi-month trend against the USD.
Looking at a longer-term weekly chart, the USD/DKK broke out of a 14-month falling wedge pattern earlier this month. Despite being created by a series of lower highs and lower lows, a falling wedge is actually a bullish pattern as it shows declining selling momentum on each additional thrust lower. As a general rule of thumb, a falling wedge patterns are strengthened by a bullish divergence with an underlying indicator, and the USD/DKK shows a beautiful divergence. The RSI failed to confirm the last four lower lows in price, suggesting that this month’s low could be particularly important.
Astute readers will also note that the recent breakout formed a clear Bullish Engulfing Candle* on the weekly chart, showing a strong shift from selling to buying pressure and foreshadowing the rally we’ve seen throughout the month of May. Finally, with the MACD approaching the “0” level for the first time in a year, a sustained shift to a more bullish outlook appears likely heading into the heart of the summer.
Rates have rallied consistently this month, so more conservative traders may prefer to wait for a pullback before buying. That said, a continuation toward the YTD highs and 38.2% Fibonacci retracement at 5.53 could be seen in the short-term, with a break above that barrier exposing the 61.8% Fibonacci retracement at 5.65 next. The medium-term outlook will remain bullish as long as the pair holds above the recent lows in the 5.35 area.
Chart courtesy of Forex.com
*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous period before buyers step in and push rates up to close above the high of the previous candle. It indicates that the buyers have wrested control of the market from the sellers.