A quiet day of trade yesterday with the US away for its Independence Day holiday allowed us the opportunity to take a step back and assess medium-term direction. Looking at the above daily chart we can see that the dollar index has been trading in a range bound fashion since early May, the lows and corrective highs posted forming the two extremes of the range at present. The one upside assault of the resistance level failed out ahead of the highs and there are several levels of support ahead of the May lows. The result; range bound trade.
Considering the range is relatively wide we also do not feel that a breakout of this range is imminent, while it could happen tomorrow the current technical indicators suggest we could remain in this lose range for several weeks still. While this is true when a break does come we favour the possibility of breaking out to the topside since we are trading near multi-year lows in the index and as such extension to the downside could be slow and incremental. Whereas a topside break could race back toward, and above, the 10,000 level with relative ease and as such looks the more likely.
This says nothing of our fundamental disposition which also favours the USD against most of its peers especially now that the Fed has wrapped up with QE2. All things considered then we believe range bound trade is likely to ensue but we do have clear barriers on each side to show when a break is made and we also believe that the buck is likely to climb out of this range rather than drop through the support levels.
Written by Jonathan Granby, DailyFX Research Team
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