Last week, investors pushed the S&P 500 to a record high for the 28th time this year.
This time, stocks jumped due to signs of cooling inflation.
But inflation data isn’t only having an impact on the stock market. It also plays a role in the world’s largest trading arena – the currency market.
While the stock market gets all the attention, ignoring currency movements is a mistake.
There are $7.5 trillion in currency trades happening every single day. So in just 17 days, currency trades equal the value of the global stock market’s trades across an entire year.
And big moves there can lead to fast profits – if you know how to trade them.
I’ve been trading currencies since the 1980s. And over my 40-year career, I’ve traded more than $500 billion worth of currencies.
That means I know when conditions are shaping up for a big move. And one is lurking around the U.S. dollar…
Tracking the King of Currencies
The U.S. dollar factors into nearly 90% of all currency exchanges, making it the world’s dominant currency.
That’s why I trade the dollar against other currencies like the euro, the Japanese yen, or the British pound.
It’s also why I pay close attention to the U.S. Dollar Index (DXY). The index tracks the dollar’s performance against a basket of other currencies.
And DXY’s chart can tip off the next big move.
When I checked in on the index previously, I identified a couple of key levels to watch. You can see them in the chart below.
I wrote this back in April:
DXY peaked in September 2022 at its highest level in over 20 years (shown with the arrow). Yet the dollar pulled back toward the 100 level into February 2023, starting a downtrend.
And since then, the dollar has been trading in a wide sideways range.
The 100 area remains support (the lower green-shaded area) while resistance rests around the 105 to 107 level (upper reddish-shaded area).
Since then, DXY has stayed in that range, as you can see in the chart above.
But I don’t expect that will be the case for long.
DXY is now hinting a big move is on the way…
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Coiling for a Massive Move
Let’s zoom in on the more recent time frame for DXY going back one year.
Notice the dashed trend lines on the chart below. It’s showing a triangle consolidation pattern.
The sideways trading range keeps getting narrower. We call this “coiling.” And it means the battle between the bulls and bears is getting more intense.
Each side is stepping in more quickly to push the dollar back in the other direction.
Eventually, one side is going to win out, and it will deliver a big move in the dollar.
While this tension is building, it’s not yet clear whether DXY will surge or slump.
So instead of guessing which way the dollar will move, we need to wait for it to break through one of the trend lines.
Then the Relative Strength Index (RSI) needs to confirm the move. You can see its action in the green line of the bottom panel.
If the dollar breaks below the lower trend line, we’ll watch to see if the RSI pushes below 40. That would confirm strong price momentum to the downside.
On the flip side, if the dollar moves above the upper trend line, we want to see the RSI rise above 60.
Whichever way the dollar decides to break, I expect a strong move to follow.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict