It looks like a long period of churning in Dollar Index futures is poised to resolve higher.
Given the duration of the basing activity, this favors a rising trend in the intermediate term (three to 12 months forward). Looking across the major currency pairs, the euro appears to be the one taking the biggest hit and the charts suggest that could continue (I had been bullish on the euro earlier this year but its uptrend stalled in May). Let’s take a look at charts of Dollar Index (DX) and euro (EC) futures individually.
Since last October, the bulls have fended off multiple tests of a floor around 79.5 multiple times. During this time, momentum has improved. The long and short moving averages of the weekly relative strength index turned concave and are now coming back above the 50 midline. Momentum tends to lead price, and the coincidence of this improvement with the basing activity in DX is bullish.
Concurrently, EC shows a well defined top over the same time period. And RSI averages have rolled over and dropped beneath the 50 midline. Given the duration and height of the top, there should be more downside to come.
Ways To Play
The trends in these markets are probably in an early phase and the way to look at this is to sell short any short-term strength in the euro or buy any short-term weakness in the dollar. Exchange traded funds to consider are UUP (PowerShares DB U.S. Dollar Index Bullish) and EUO (ProShares UltraShort Euro).
