US dollar index
The pain in the Dollar index is close to unbearable to bulls. Ever since the Fed opened its swap lines and the Congress delivered massive fiscal stimulus, the USD is on a one-way street. Lower.
Today’s price action marks yet another leg lower. So far in the trading day, the EURUSD is back above 1.19. Responsible for over half of the DXY’s componence, the EURUSD is on traders’ radar when interpreting the possible turns in the DXY.
The price of gold reached an all-time high during the current health crisis. It broke above the $2,000 with little or no corrections on its way to the upside. However, it feels stretched at the current levels.
If we compare the two – gold, in blue below, and the Dollar index – on a daily chart, we see how they performed in the months since the crisis began. Initially, markets panicked.
In March, there fewer dollars in the financial system than investors wanted. Until the Fed intervened, the USD rose dramatically. However, the price of gold, while moving South, it did so reluctantly.
At the current levels, there seems to be a divergence between the price of gold and the Dollar index. Namely, as gold made a new all-time high above $2,000, so did the DXY. But now, gold is far from the recent high, while the Dollar index pushes towards new lows. Hence, one is lying.
If gold led the price action in the Dollar index so far, as history suggests, would not this be the bearish divergence to send gold lower and the Dollar index higher?
From a technical point of view, the best way to trade this divergence is to short the currency pair with the largest weight in the index. More precisely, the EURSD.
Yes, the trade is risky and should be taken with half the normal exposure. Going short 1.19 with 1.20 stop loss and targeting 1.15 makes sense from a contrarian point of view.
