By: Mike Golembesky

The U.S. Dollar (DXY Index) hit a low of 92.55 last week and has since moved up just about 1% off of that low. While not a huge gain from a percentage point of view, given the U.S. Dollar's fairly deep fall since the January highs this is a relatively significant move up off of the lows. Furthermore, the structure up off of this 92.55 low is suggestive that the U.S. Dollar should still move higher in the near term.

There are still several price resistance levels that the DXY  needs to break to signal that this move is something other than just a short term corrective bounce. Given where we are in the pattern we may not have an answer to this question for several months to come. The structure of the move up off of the lows and the overhead resistance levels should help give further guidance in this regard.

Last week I discussed the composition of the DXY Index. In particular, how heavily weighted it was towards the European currency pairs. The EUR/USD currency pair has a very overweight position in the DXY Index making up 58% of the index itself. This makes it difficult for the DXY index to move without an inverse move of the EUR/USD currency. So with the EUR/USD making up such a large portion of the DXY index, it is often helpful to keep a close eye on the pattern of that individual pair as well as the DXY itself.

Unfortunately, the pattern on the EUR/USD is not as supportive of the same strength that the DXY itself is displaying. So, while the pattern of the DXY suggests higher levels prior to making a local top, the pattern on the EUR/USD is more supportive that this move up on the DXY may be a bit more short-lived and still has some more work to do to the downside prior to making a more significant bottom.

Last week I noted that with the continued extension lower on the DXY I was looking towards the 92.72 level as support. This level represented the 261.8 extension of the move down off of the March highs. While the DXY did poke under this level just slightly, we did not see a sustained break of the level. This allowed us to consider this support level as held. With the bounce higher we do now have initial confirmation that we may have at least a local bottom in place although we do still lack confirmation of a more sustained bottom.

Until this can get over the short-term resistance level of 96.06-97.92, the DXY still likely has more work to do to the downside prior to seeing a more lasting bottom and moving higher once again.  If that lower low is struck however I want to reiterate that the DXY would be closing in on a much larger degree support. This support remains at the 91.12 level. If that level is broken it would open the door to a large degree top having been struck with the January of 2017 highs as I noted last week.

The DXY certainly has seen a fairly decent bounce off of the lows as it has moved strongly higher. It does however still has quite a bit left to prove and more work to be done before the coast is clear to much higher levels.