Bearish Dollar Breakdown, Fuel For A Year-End Rally

6 нояб. 2023 г.

Key to much of the market’s late 2022 and first-half of 2023 rally was a general move lower in the US Dollar Index (DXY). Mostly a short play on the euro, the DXY is a key macro indicator – when it’s rising, it is considered a ‘risk-off’ environment for stocks while significant equity bull markets have featured sideways or downward moves in the greenback. Nothing is set in stone, though, and there have certainly been periods where both the S&P 500 and the buck moved higher in tandem.

Today, though, it’s clear that the usual negative correlation is in play. Just take a look at last week. The SPX enjoyed its best week since November last year as the DXY suffered its worst weekly decline since July. The dollar had been on a great run for much of the second half – with the Invesco Bullish Dollar ETF (UUP) rising in 13 out of 14 weeks, undoubtedly inflicting pain on stock market bulls. That trend may have ended just in time for the usual November-December equity rally.

This week’s chart illustrates a bearish breakdown in the US Dollar Index. The DXY had steadied itself in a range between 105.50 and 107 during October. Last week, and so far this morning, the index is under the key 105-105.50 zone. There’s now a bearish measured move price objective to just under 104. Now, the dollar does not have to collapse to get stocks trending higher over the months ahead, but a bearish DXY bias would be another bullish piece of evidence for investors to consider as strong seasonal trends persist in the next two months.