Between February 2 and March 8, the U.S. Dollar Index (DXY) rallied just over 5%.
Since then, DXY has given back all of those gains.
This has left currency traders wondering when the dollar is going to make its next big move and in which direction that move will be.
The “when” part of the equation seems quite straightforward. The Fed’s next meeting is on May 3, when they will announce their next interest rate decision.
Whatever the outcome, it’s almost guaranteed there will be significant volatility in the markets.
Which direction the dollar will take is a lot more complicated…
That’s why I’ve prepared a fresh chart of the U.S. Dollar Index below so I can walk you through both a bullish and bearish case.
Check out the chart below…
The key feature of this chart is the large head and shoulders pattern that’s been taking shape since July 2022.
This chart pattern is a classic bearish setup made up of three components – the left shoulder, head, and right shoulder.
Once all three pieces of the pattern are in place, you can draw the neckline which connects the bases of both shoulders.
The pattern is complete once prices break below the neckline.
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There’s only one issue with this particular head and shoulders setup… it’s too obvious!
I scanned my Twitter feed to see if any other traders have spotted the same pattern, and indeed they have. This pattern has garnered thousands of views on Twitter alone.
As Jeff Clark likes to say, the market rarely rewards the popular trade.
That doesn’t mean that the dollar isn’t due for a lot more downside, it just means that I recommend being cautious with this particular setup.
I’d like to see at least three days where DXY is trading below the neckline. If we get that occurrence, then I’ll be a lot more inclined to trust the pattern.
But on the other hand, it’s also very possible that dollar bulls will step in to defend the currency, negating the bearish potential of this pattern.
Either way, the dollar seems poised for a big move. Until the direction of that move becomes clearer, it’s advisable for currency traders to stay on the sidelines.
I’ll be sure to update you on the dollar’s movements very soon.
What do you think about DXY’s next direction?
Let us know your thoughts – and any questions you have – at [email protected].