After surging higher over the last three weeks, the U.S. dollar is testing against a key resistance level as we roll into a new trading week.
From a fundamental perspective, the catalyst for the rally has been continued surprisingly strong data out of the U.S., but with a relative data void in the U.S. this week, the buck may struggle to extend its gains in the short term.
The technical picture also suggests that the greenback may be due for a breather this week. The USD Index (not shown) is pressing against the critical 81.50 level that has put a ceiling on the index for nearly a year. The 81.50 area is also the neckline of a potential double bottom pattern at the 79.00 level, meaning that a confirmed break through this barrier could open the door for a continuation all the way toward last year’s highs near the 84.00 level.
Beyond the price resistance level, the dollar index’s RSI indicator is also in overbought territory, further supporting the notion that the buck could pullback, or at least consolidate, in this week’s trade.
Technical View: USD/CHF
For this week, the USD/CHF, one of the dollar index’s main constituents, may serve as a useful analog for the dollar index as a whole. Rates surged through its 7-month high at .9035 last week before losing momentum around the .9100 handle and pulling back on Friday. Taking a step back, the unit’s momentum remains to the topside as long as the MACD continues to trend higher above its signal line and the “0” level.
Like the dollar index itself, USD/CHF is flirting with overbought territory, suggesting that we may see a near-term correction this week. Of course, we could see a classic “correction through price,” where the exchange rate pulls back toward previous-resistance-turned-support in the .9000-.9035 area; alternatively, the pair may “correct through time,” meaning that it could just consolidate and digest last week’s gains without pulling back substantially.
Regardless of which scenario we see (or even if the USD/CHF continues to rally without any type of correction), the bias will remain to the topside as long as rates hold above the key .9000-.9035 support zone. To the topside, the next target for medium-term bulls may be the 38.2% Fibonacci retracement of the May 2013 – March 2014 drop at .9137.
Finally, a drop through key psychological support at .9000 would erase the pair’s bullish outlook and raise questions about the sustainability of the rally in the dollar index as a whole.