Technical Analysis of the US$ from a relative strength standpoint:
From a relative strength analysis, it appears that the US $ is set to commence another strong run in the near future and the timing somewhat coincides with the outcome of the general elections in November. This relative strength is exhibited when the US dollar’s performance against the constituent parts of the dollar index namely Euro, Yen, Lonnie and Pound is analyzed independently. The Swedish Krona and Swiss Francs, which occupy the lowest ratios in the index have been left out. However, the general trend is clear as the dollar exhibits strength against all these currencies and thus the relative strength is positive for the US$ in the intermediate term.
Let’s review the Euro dollar parity, purely from a technical analysis perspective. From a Point and Figure analysis we see two legitimate targets, both of which stand activated, yet only one has been achieved at the 1.05-euro dollar parity. The next target is 0.90, which was thought of as a long shot in the past but now appears to be a near reality as political dark clouds surmount in the Eurozone. The line chart exhibits a WXY corrective pattern emerging and possible is in its penultimate stage as a five wave downward pattern operates through the channel and the 4th wave unravels. Going forward it can be expected that after the unravelling of this wave the 5th wave would be the final downwards movement. It is this point that the investors have to be wary of, as the price action technically has the chance to attain the second target of 0.90 level. Coupled with this the political climate in the Eurozone should be understood with clarity because it is only in the case of upheaval that market volatility can manifest for the pricing to dive and reaching this target. If political climate remains smooth this, then, can aid in the Euro recovery rather than a further depreciation.
In the case of US$ loonie the parity is also looking to go up after having achieved more than a decade high of 1.44 level after beginning a retracement and after retraced to the 38.2% level it is now peering to go up again. But the interesting fact in this case is that the 1.44 level is a target that was triggered twice on the up move and was finally achieved. Looking ahead it appears that there are no more targets other than these which seem viable, and on a dollar rebound this is the maximum level that can be achieved and nothing beyond this. So if an ABC correction is to completely follow through then we see the price action taking the US$ back to the high 1.3’s or even 1.44 level, before cooling off again. Or if it is a WXY correction then we see a more moderate, yet a prolonged, price appreciation before a final movement downwards, which would herald a complete breakdown of the US$. But this phenomenon is a long way off, and we are looking into the mid to late 2017 for such a price action to take place and could come about when recessionary conditions hit economic growth in the US.
When we review the GBPUS$ parity, we witness that the pound has been under tremendous pressure as of late, and it has reached a threshold, which is the 1.28 parity. Price action under this level would be representative of a complete breakdown of the pound. From a Point and Figure standpoint we see that all targets have already been reached and it would take the price action to operate at a level of ~1.28 for the next target to be activated. If this turns out to be the case, then we see the exchange rate hovering at the 1.14-1.15 level. From a risk reward standpoint of ~ 2.5, which would be a favorable condition for the US$ to attain this level.
Finally reviewing the Yen-dollar exchange rate parity we have witnessed that the Yen has appreciated extraordinarily against the US$ and this momentum is probably set to continue until the final parity of 95 is reached before the US$ can commence a path to recovery. The 95 exchange rate mark coincidentally refers to a Fibonacci retracement level of 61.8% and also re-emphasizes the activated point and figure target of 95. So yes, while the intermediate term seems up for the US$, however, near term there is a dip in the offing.
Thus, when we do a component wise analysis of the US dollar index, we do witness, a general upward bias in the US$ in the intermediate term. Also it would take some time for recessionary conditions to set in as yield curve bias has turned negative even though the US$ seems to possess enough momentum to continue its upward climb. So the US$ may continue its joy ride to an unsustainable level, as the yield curve bias (term structure bias) turns more and more negative, before the markets start witnessing a drastic fall across all pairs, thus stating a reversal of the relative strength of the dollar that it currently enjoys.