The team and I have been digging through our currency charts today, trying to figure out if we should trust these new lows in the Dollar Index.
And the truth is, there is plenty we could say about dollars right now, but I don’t think it would help.
The Dollar Index is going to go in the opposite direction of these bull flags in EUR and GBP.
It’s really that simple.
And as far as other currencies go, I think we can expect them to follow the majors. Some of them are already breaking out.
Remember, the major developed currencies started trending well against the dollar first, and then emerging currencies gradually followed.
I expect that intermarket cadence will continue during the next wave of dollar weakness.
And it looks like it already is. Here’s the Euro and Pound resolving their coils higher against USD:
Both of these currencies ramped to fresh multi-year highs in April and have been consolidating in continuation patterns ever since.
This action reminds me of some of the bull flags we’ve been trading in the equity market. The essence of the patterns is the same.
And guess what— the vast majority have resolved higher.
I don’t expect it to be any different for EUR and GBP here. They both appear to be making decisive resolutions as we speak, going out at fresh cycle highs today.
If these breakouts remain valid, these currencies are on a path to retest their 2021 highs.
And if that’s happening, DXY is making a fresh leg lower and confirming this massive top.
Of course, there is a chance these patterns fail and resolve lower. In that case, look out for a counter-trend rip from DXY. But, it’s not the bet I’m making based on the information we have today. These breakouts look solid.
And I think the implications are the same as usual: strength from commodities, commodity stocks, and international equities.
I think rates are also due to catch lower under this scenario, and that should bode well for interest rate-sensitive areas of the market.
So it’s all about those bull flags. If they do what most of the bull flags are doing out here— look out for lower dollars… and buy the things that do best in a weak dollar environment.
That’s it. That’s the currency market playbook for now.
