Dollar Bears Get a Close-Up View of Stiff Technical Barriers

  • Greenback underpinned by confluence of important levels
  • Treasury yields below 100-day average backs dollar’s decline

Pimco's Crescenzi Says Stalled-Out Dollar Is Good News

The dollar index is nearing an inflection point. A set of key technical levels that has underpinned the greenback is within striking distance, which if breached could signal prolonged weakness.

The bullish turn of Treasuries and positioning in the currency options market could hasten the downfall of the gauge, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.

The DXY has dipped below the year-to-date low of 99.23 set before President Donald Trump failed to push through his health-care reform. If this move holds on a daily and weekly closing basis, that could spell trouble for dollar bulls.

Still, dollar bears have to contend with a confluence of barriers that continue to support the U.S. currency.

While the DXY has dropped below the 38.2 percent of Fibonacci retracement line of the rally from May to January, the 200-day moving average and the May 2016 bull trendline could act as the next line of defense. Before that, an important level to watch would be 98.92, the 61.8 percent Fibonacci retracement of the rally since Trump’s electoral win.

A closing break back above 100 would neutralize the near-term downside risks.

Read more on the dollar index’s key technical levels

The downside bias for the dollar index is corroborated by the decline in the 10-year Treasury yield below the 100-day moving average for the first time since September as well as the fall in the Bloomberg Dollar Spot Index’s three-month 25-delta risk reversal, a gauge of market positioning and sentiment, to the lowest since Aug. 2016.

A bearish flag pattern, formed by drawing two parallel lines based on recent intraday highs and lows, has reinforced the bearish outlook for Treasury yields.

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