DXY bear trap – what currency pairs to look at
So here we are with a break of DXY but not able to manage a day close below ‘peak rate hike disappointment‘ level, the index is off its low with a rebound – accompanied by failed breaks in EURUSD and GBPUSD.
I do not think that this is a signal from the market that there is faith in the USD – it just means that a real break is left for another day. In other words, the market is not ready to challenge Janet Yellen yet (she maintains bragging rights to call for rate hike for any reason). If one must insist on a good reason, call it DXY-oversoldness. So false break, bear trap.
Question: what pairs to look at?
This is price action right after DXY ‘bottom’. CAD turns out to be weakest and SGD strongest. Trade combinations include USDCAD long, AUDUSD and NZDUSD short or crosses such as short CADSGD, long EURCAD. As a reminder, the idea is to combine currencies furthest from each other.
WTI connection to DXY
Should DXY recovery be sustained, WTI short is a possibility. WTI has a demonstrated inverse correlation to the USD. This relationship was explored in this article. See also WTI weekly chart here showing confluence of resistance.