Dollar index hovers near support

The dollar index bounced off support of 78.75 last Friday and market players are on the sidelines watching if the support will hold.

A break of that support area will take the index down to the 78 level, which was a base of a strong rally in the dollar. However, if the index rallies, it can go up to the 80 level.

Note that since late November last year, the index has been range-bound after hitting resistance at the 81.25 level. The index broke above the 50 and 200 day exponential moving averages, then traded between the two for sometime and then finally broke below it last week.

This shows indecision and market players are waiting for the dollar give a clear sense of direction after the strong rally beginning early November last year. We are long dollar since last Friday with a stop below 78.75. In case the index breaks below 78.75, we’d exit the dollar and go long again in the 78 level with a stop below 77.75.

US dollar-Indian rupee
As the dollar index comes down to support, so does the USD/INR pair. The support for the pair is in the range of 43.85-44.50. The pair had ranged in this level for nearly two months, before breaking out of it in November last year. As the pair enters the support level, it is an opportunity for rupee bears to go long on the dollar. We would have our stop below the 43.85 level. USD/INR has been in a steady downtrend since March 6, 2009, the day the stock markets bottomed. From a long-term perspective, if the current support level is broken, the pair can go all the way down to 42.

Euro-US dollar
The imminent death cross that we mentioned last week was just 4 pips away as of last Friday. In the last three days, EUR/USD rallied nearly 300 pips, which prevented the crossover of the 50-day exponential moving average (EMA) below the 200-day EMA. Last Friday, the 50-day EMA closed at 1.3349 and the 200-day EMA was at 1.3345. A death cross is considered bearish in a trending market. However, the pair has been range-bound from a long-term perspective, making the crossover less significant.

The resistance levels on the euro are in the ranges of 1.3460-1.3498, 1.3582-1.3606 and 1.3748-1.3785. The support levels, on the other hand, are in the ranges of 1.4295-1.3252 and 1.3145-1.3105.

Aus dollar-US dollar
The pair continues on its uptrend and formed a bullish pattern last week — the inverse head and shoulders. The pattern is not very strong if it forms after a strong rally, as in AUD/USD. However, based on it, the pair can rally all the way up to 1.0575. It closed at 1.0236. Last Friday, the pair also broke out of its earlier high of 1.0175, which can attract a lot of breakout traders, pushing the pair higher. We would, however, not buy into the breakout and wait for a pullback to the previous high of 1.0175, before going long.

US dollar-Japanese yen
The yen continues to rally against the dollar after a brief reversal. The USD/JPY pair had moved above its 50-day EMA, but has since fallen below it. There is support in the 80 area. Also, Japanese authorities have begun talking about intervention again, which can be bullish for the pair. The last time the authorities intervened, at the 83 level, there was a 200 pip rally. But the intervention was futile as the pair has since fallen way below the 83 level.

The writer is editor, www.capturetrends.com, and is based in Chicago.