- The US Dollar Index has touched down on a key support level at the 100 mark.
- This has historically provided a springboard for a recovery, however, it is too early to say whether history will repeat itself.
The US Dollar Index (DXY) is in a medium and long-term sideways trend within a multi-year range. Since late July it has been steadily unfolding a down leg within that range from the ceiling at around 105, to the range floor at the 100 level.
100 is important. Apart from being a key psychological level, 100 is also a major historical support level which has provided a safety net to falling prices on three prior occasions since 2023 (circled below). The question is, will 100 come to the rescue again on this occasion?
US Dollar Index Daily Chart
Price action is still bearish and there are no strong bullish reversal patterns forming – neither of the shape or the candlestick variety. This suggests a risk of more downside. A continuation south would probably see DXY reach the next support level at the 99.57, the July 2023 low. This is the lowest floor of the range – a decisive break below there would be a very bearish sign.
The Relative Strength Index (RSI) momentum indicator is oversold on both the daily chart and weekly chart (not shown). This suggests prices are overextended to the downside and there is a greater risk of a pull back occurring.
However, RSI has not yet exited the oversold zone, a necessary prerequisite for a buy signal. As things stand, the fact the RSI is oversold is merely a warning for bears not to add to their short positions, it would have to fully rise out of oversold to provide a reversal signal.
The Moving Average Convergence Divergence (MACD) momentum oscillator has not crossed above its red signal line yet either. This too would be required to provide a buy signal.
To conclude, there is a risk that although the US Dollar Index has reached a historic low it could simply continue falling unless price action forms a reversal pattern or momentum indicators provide firm buy signals.
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