June 20, 2011: The dollar index continued it's rally last week, but ran into a wall of resistance and sold off. The commodity and equity markets are watching the dollar for price direction.

Last week, we had mentioned that dollar was giving signs of bullishness by making higher lows. The definition of a bullish trend is when prices make higher lows and higher highs. A higher low is made when the latest low in price is higher than the previous low and a higher high is when the latest high in price is higher than the previous high. 

On June 7, the dollar made a higher high and rallied. The dollar touched 73.88, which was the latest low with the previous low being 72.27. This is first indication that the dollar may be turning bullish. But the trend will be confirmed only after the greenback breaks above the most recent high of 76.95 made on May 23. The greenback rallied strongly to touch 76.50, but could not close above 76.95 to confirm the bullish trend. We had mentioned that dollar faced resistance in the 76.24 to 76.97 level.

We believe that the dollar will make another attempt to break out of the 76.97 level but may sell off a bit before doing so. The charts show that the dollar could rally from the 75.25 level. It closed near the 75.50 level last Friday. If that level fails, we can see prices go down to 74.50 to 74.75 level before rallying.

Once the 76.97 level is cleared, the chart shows a lot of resistance levels, which will make it difficult for the dollar to rally strongly. On the long term charts the dollar is bearish and our analysis shows that the currency could drop as much as 15 to 20% over the next few years. Hence any rally in the dollar is just a short to medium term correction.

Commodity and global equity investors are keeping an eye on dollar, as a rise in the dollar could lead to a sell off in equities and commodities. Interestingly, the dollar is coming up to resistance as the equity markets came into support. This week may give an indication where the markets are headed in the near future.

British Pound - US Dollar

The GBPUSD pair has been moving a range of 1.6050 and 1.6775 for several weeks now. This is a wide range in the forex market where one could buy at the top of the range and sell at the bottom of the range. We feel that the prices could stay in that range for a long time as the last time prices were in that level it ranged for seven months between May 2009 and January 2010. 

If the pair breaks above or below that range, it could catch a trend. But till such time a range trading strategy is the best approach.