US Dollar Index (DX) Futures Technical Analysis – Index Overwhelmed by Heavily Weighted Euro, British Pound
September U.S. Dollar Index futures finished sharply lower on Wednesday despite an uptick in U.S. Treasury yields. The index was primarily driven lower by strong performances by the Euro and British Pound.
When trading the U.S. Dollar Index, keep in mind that it’s a weighted geometric mean of the dollar’s value relative to the other select currencies. The current weightings are Euro (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).
So when the Euro and the British Pound post strong performances, the index tends to get pounded lower like it did on Tuesday and Wednesday. It give the appearance that the dollar is weakening because the economy is falling apart when this isn’t the case. It’s just being overwhelmed by the two currencies with the heaviest weights.
Also keep in mind that the weightings work the other way too so when momentum investors come to their senses and stop driving the Euro higher, the Euro should fall and the Dollar Index should rise.
The European Central Bank tried their best to stop the rally on Wednesday when it said that the remarks by ECB President Mario Draghi had been misinterpreted on Tuesday, triggering a strong surge to the upside. The markets interpreted his remarks as a sign that the bank was preparing to reduce its monetary stimulus.
However, the move to the upside attracted the attention of momentum traders and these guys just want price action. The momentum will stop when the market runs into a big block of sellers, but right now the bullish wheels have been set in motion.
As long as the Euro and British Pound continue to move higher together, the U.S. Dollar stands little chance of rallying. Even if the USD/JPY rallies, the break in the Japanese Yen is not likely to offset the gains in the Euro and British Pound. This should continue to give the index a strong downside bias.
Technically, now that the September U.S. Dollar Index has crossed to the weak side of the November 9, 2016 main bottom at 95.80, it has nowhere to go except down into the September 22, 2016 main bottom at 94.97. This is, of course, unless the Euro and British Pound weaken enough to drive the dollar index back above 95.80.
This article was originally posted on FX Empire