The strength in the dollar index resulted in a drop of other majors such as the euro (EUR), yen (JPY), and British pound (GBP). We had predicted a rally in the dollar index as it was entering a major area of support in the 80 area. Now the rally has taken the greenback (USD) to areas of resistance, which must be broken for a continuation of the rally.

The 3.5% rally last week took the dollar to nearly 83 from a low of 80. However, the look at the chart shows that the index is right now just below the 50-day EMA, which may act as resistance. The 50-day EMA was at 83.05 at the close of trading last Friday. In addition to the moving average the index faces a resistance zone in the 83.25-83.50 area. This may slow down the rally and lead to a correction.

The sharp rally last week indicates that the index has the strength to move higher, possibly after a pullback. Remember that the US dollar is a safe haven currency that strengthens when the equity market falls and risk aversion increases. Given the increased risk of a nascent US recovery losing steam, the rise of the greenback is possible.

Euro-dollar
As the dollar index rallied, the euro sold off from the resistance area identified in last week’s column in the 1.33-1.34 area. The sell-off was sharp, taking the EUR-USD pair below the 50 and 200-day EMAs, which is bearish. However, now is not the time to short the pair, as prices closed Friday in the 1.2750 area, which is a decent support area, increasing the chances of a relief rally. Given the sharp drop in the pair, there is high probability of a rally or consolidation in price. However, if prices close below 1.27, we can see a further drop to the next support level of 1.25.

Pound-dollar
The GBP-USD pair too sold off last week even though it was not at its major area of resistance. The pair fell from the 1.60 area, which was minor resistance, but the dollar index rally from support last week, triggered an early correction. The pound is relatively stronger than the euro when measured against the dollar and has had steady rally since May, with a lot of support zones below the 1.52 area. In a strong dollar scenario, the euro has the potential to fall further than the pound.

Dollar-yen
The USD-JPY pair too saw a minor rally as both the dollar and the yen were at support last week. The yen is at a long-term support zone of 81-84 area from where it rallied last week. Additionally, anticipation of the Japanese central bank’s intervention was also a factor that drove the pair higher.

The pair has to close above the 86.50 area to break a downtrend line and move higher. A break above 86 can take the pair to the 88 area, which is the next resistance.

Dollar index chart

Dollar index chart