There has been a clear and strengthening breakdown in the USD basket. It’s the speed of decline that has been interesting; it’s been accelerating in recent days so much that it could be described as a ‘falling knife’.
We had been watching the wedge patterns presented in many USD pairs over the past 6 weeks and we are looking for breakouts to give us a trade direction.
The interesting part here is that the likes of the EUR, GBP, AUD and NZD all broke at the same time and in the same direction, amplifying the USD’s decline.
Remember this weakness in DXY has been driven by several fundamental leavers:
· The reopening of economies
· Mass fiscal stimulus
· Huge Central bank accommodation
· And a USD specific issue being the Fed gearing up for further stimulus packages and new intervention policies
Returning to the technical break out and ‘the speed’. This decline in DXY has been so aggressive that it has created very strong red flags in RSI indicators and the like; suggesting DXY’s sell off could be overdone and due for a pullback.
The RSI oversold flag is very apparent in the chart above. At sub-20 (16.2 at the bottom) the dollar basket was screaming oversold, something it doesn’t tend to stay at for long and did reverse. But the chart and RSI show that DXY is now falling again and is heading back into the sub-20 area. This will be a very interesting inflection point over the coming days and a flag to watch, a flag we expect to be respected, and a pullback is likely.
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