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US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

US Dollar Index, EUR/USD, AUD/USD, DXY, Time Cycle Analysis – Talking Points:

  • Time-cycle analysis suggests the US Dollar is poised to significantly underperform its major counterparts after breaking below key support.
  • EUR/USD carving out a Bull Flag pattern just below psychological resistance.
  • AUD/USD rates eyeing push to yearly high.
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The anti-risk US Dollar may continue to lose ground against its major counterparts, as long-term price analysis suggests a cyclical downturn is in the offing.

US Dollar Index (DXY) Monthly Chart – Cyclical Downturn Afoot

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

DXY monthly chart created using TradingView

The chart above highlights the cyclical pattern seen in the US Dollar Index over the past 34 years, with the DXY largely adhering to what appears to be a 16-year rotation. The index set significant bottoms in 1992 and 2008.

After bottoming out, price then seems to rebound aggressively early in the cycle, soaring 24.1% and 26.8% in 1993 and 2009 respectively, before pulling back to key support at the 88.6% Fibonacci.

A 6-year period of sustained USD strength follows this counter-trend pullback, with price climbing 50.1% from the 1995 low and 42.8% from the 2011 low, to set key highs in 2001 and 2017.

Bearish RSI divergence in late 2002 seemed to signal the end of the US Dollar’s bull run and triggered a shift in overall market sentiment, as price collapsed through uptrend support and fell 41.6% to eventually bottom in March 2008.

Recent price action and the development of the RSI is strikingly similar to that seen in the fourth quarter of 2002 and could be indicative of further downside for the DXY, as price carves out a Bear Flag continuation pattern after breaking below the uptrend extending from the 2011 low.

To that end, the haven-associated currency could be poised to drastically extend its recent declines against its major counterparts, with cycle analysis suggesting USD could fall a further 30% from current levels before bottoming out in mid-2024.

EUR/USD Weekly Chart – Bull Flag in Play

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

EUR/USD weekly chart created using TradingView

Weekly EUR/USD price action also hints at further losses for the Greenback, as price carves out a Bull Flag continuation pattern just below key psychological resistance at the 1.20 mark.

With the RSI and MACD indicator both tracking firmly above their respective neutral midpoints, and the 50- and 200-week moving averages forming a bullish ‘golden cross’ formation, the path of least resistance seems skewed to the topside.

A close above the August high (1.2011) is ultimately needed to signal a resumption of the primary uptrend extending from the March nadir and bring the 2018 high (1.2556) into focus.

Conversely, a break below the 50% Fibonacci (1.1590) would probably invalidate the bullish continuation pattern and generate a pullback towards the sentiment-defining 200-MA (1.1438).

EUR/USD Daily Chart – 21-DMA Guiding Price Higher

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

EUR/USD daily chart created using TradingView

Zooming into a daily chart reinforces the bullish outlook for EUR/USD rates depicted on the weekly timeframe, as price tracks firmly above the trend-defining 50-DMA (1.1753) and key psychological support at the 1.18 mark.

However, the formation of a Bearish Engulfing candle on November 9, in tandem with bearish RSI divergence suggests that the rebound from the monthly low (1.1602) may be running out steam.

With that in mind, a pullback towards the August low (1.1696) could be on the cards if sellers can hurdle the 50-DMA (1.1753).

That being said, an extended topside push looks likely if support at the 21-DMA (1.1775) remains intact, with a daily close above 1.19 probably igniting a push to test the September high (1.2011).

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

Retail trader data shows 28.25% of traders are net-long with the ratio of traders short to long at 2.54 to 1. The number of traders net-long is 5.42% higher than yesterday and 29.77% lower from last week, while the number of traders net-short is 12.10% higher than yesterday and 43.82% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

AUD/USD Weekly Chart – Break of Long-Term Resistance Hints at Topside Push

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

AUD/USD weekly chart created using TradingView

AUD/USD rates appear poised to continue moving higher, as price forms a bullish Outside Week candle above key support at the psychologically imposing 0.70 level.

With the RSI eyeing a push above 60 and the MACD gearing up to cross above its ‘slower’ signal line counterpart, the path of least resistance seems higher.

A weekly close above the September high (0.7413) would probably generate a test of the 78.6% Fibonacci (0.7573) and possibly carve a path towards the 2018 high (0.8136).

On the contrary, a breach of support at the 200-MA (0.7207) could open the door to a more significant pullback and bring the November low (0.6991) into play.

AUD/USD Daily Chart – Series of Dojis Hint at Exhaustion

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

AUD/USD daily chart created using TradingView

Jumping into a daily chart however, suggests AUD/USD may slide lower in the near term as a series of Doji candles just shy of resistance at 0.7300 indicate that the surge from the monthly low (0.6991) could be running out of steam.

Nevertheless, with price breaking above the Descending Triangle hypotenuse and travelling firmly above all four moving averages, any pullback may prove to be a mere counter-trend correction.

Therefore, AUD/USD could test the yearly high (0.7413) in the coming days if price remains constructively positioned above the 21-DMA (0.7176), with a daily close above 0.7450 probably propelling price towards the 78.6% Fibonacci (0.7573).

On the other hand, a break below the 50-DMA (0.7157) would probably open the door to test key support at the November low (0.6991).

US Dollar Cycle Analysis: Implications for DXY, EUR/USD, AUD/USD

Retail trader data shows 27.55% of traders are net-long with the ratio of traders short to long at 2.63 to 1. The number of traders net-long is 5.97% lower than yesterday and 20.45% lower from last week, while the number of traders net-short is 22.38% higher than yesterday and 36.01% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bullish contrarian trading bias.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss