US Dollar Index Could Be Ready for a Pullback

Late summer last year we here at Wizetrade identified a few things. A wedge in the USD index, the idea that “risk aversion” was about to pick up and that the USD would be the safe haven currency of choice and turned our bias very bullish the USD mid summer. In addition, the monthly chart had posted a higher low, and so the rally begun….

In recent weeks the parade of analysts on the other financial news networks have been “long and strong the USD” and frankly…a little late to the party? Where were you mid summer? My normal viewers of the Morning EDGE webinar and long time customers of Wizetrade know it was fairly “lonely” as a USD bull back then. Today….perhaps there may be too many out there.

At this point the daily chart is challenging its support, and if we close below 80.50 we could start a more meaningful pullback in the USD index. However, before you “link” a weak USD to strong equities, make sure you go back to this chart I posted a few days ago:

http://thefxcafe.com/2012/01/11/correlations-and-convergencesdivergences/

When looking at correlations, keep in mind they do “snap” from time to time. And many hedgers will get long both the EUR/USD and US equities and play the divergence as a hedge, hoping one trade may offset the other in the event the correlations meet again. So, with that being said, for you equity market bulls, watching how stocks respond to the USD sell off (if it happens) will be key.

Happy Trading,

Blake Morrow

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About Brasil61

Chris Bayer is an independent Forex trader using simple technical analysis and refined market observation based on candle to candle price action in multiple time frames, his approach focuses on entry and risk control. Chris comments on the FX market and financial news every morning with his DAILY .. “The First Shot” morning webinar starting at 5:59 am est and throughout the day on twitter as @Brasil61 Chris has a strong understanding of international economics and inter-market relationships. He has made a living trading daily for the last 9 years and has been a successful investor in the markets for the last 25.