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Dollar Index Keeps Falling – How to Trade a Possible Reversal

The beginning of summer saw the dollar index falling without a bottom in sight. Nothing seems to help the greenback as investors flee from the Fed’s money-printing machine.

However, dollar bulls watch on the sidelines for possible reversal patterns. The dollar index price action from the 103 to the current 93 level looks like a falling wedge pattern. At the first sign of a possible reversal, dollar bulls stand ready to intervene.

What to Consider When Trading the Dollar Index

Two things are worth considering before trading the dollar in the months ahead. First, the Federal Reserve of the United States.

Yesterday’s FOMC Statement introduced a direct reference to the coronavirus outbreak. More precisely, it linked the possible economic recovery to the control of the virus. Effectively, it means that the Fed will not withdraw the swap lines nor the easing stance until the virus is under control. Until then, the DXY is poised to suffer.

Second, the U.S. elections come closer by the day. Three months from now, the Presidential elections in the United States will create volatility on financial markets, similar to the one seen on the U.K. referendum vote and on Trump’s election in 2016.

But before the actual vote, the polls will send the dollar index higher and lower in a jiffy. Also, the three debates between the two presidential candidates will be closely watched by market participants.

Dollar Index Technical Analysis

It is unlikely that the dollar index will bounce strongly in the months ahead. If anything, we will probably see new lows.

However, one cannot ignore the bullish reversal pattern in the making. But the problem with wedges, especially on such big timeframes, is that the market may keep forming marginal lows before breaking the upper edge.

To trade a possible reversal, focus on the lower edge. More precisely, look for Japanese reversal patterns such as a hammer, morning star, piercing, or even a doji candlestick. When one forms, wait for the price to break the upper edge. Next, go long with a stop-loss at the lows. Finally, set a target twice as big as the risk.

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Dollar Index Price Forecast

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