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Dollar Index Defies Gravity

Dollar Index Defies Gravity
February has seen a period of trade on the dollar index that has broken the historical inverse correlation between equities and the greenback. History shows a 12-month link that runs around 90%, that on any given day would have S&P 500 moving in the opposite direction to the dollar index. Although equities have maintained bids at yearly highs, February has been a month of sideways movement in general on stocks, which is being mirrored in dollar index trade.
An overlay of the dollar index on the S&P 500 chart shows all of February, through until the 17th, having the dollar tracking S&P movement virtually bid for bid. Thursday bucked that trend with violent overnight equity moves that initially tested support and then reversed to move back higher, which finally forced the dollar index to move in the opposite direction and test support.

The dollar index remains firmly embedded around the 78.00 area, with no indication whatsoever that global market participants will allow an easy test of support at 76.00, with absolutely no indication that a move lower to 72.00 is going to be forthcoming. The path of least resistance for the dollar looks to be a continuation of the sideways crawl that has major global currencies holding ground against the dollar, albeit at a snail’s pace

There is an inclination that as soon as S&P 500 equity trade fails to hold support market participants will drive the dollar index up and through 79.00, targeting 82.00 in the near-term. As yet, that has not followed through, and the sideways crawl continues in both equity, commodity, and dollar index trade.

Traders will be very much aware that most foreign exchange moves are coming at the opening of each regional equity market trade, and subsequently then in reaction to red -flag economic releases that are individually moving major currencies on any given day. The weighting of the dollar index leans heavily towards European currencies, with only 20% of the index value coming outside of the euro zone, which has allowed individual currency pairs the ability to test previous sessions highs or lows, but not easily break and hold.

In review of the global trading arena, it is very clear that the markets are entering a phase that will fundamentally challenge historical norms in regard to price action, daily momentum, and expectancy for any position to be able to hold overnight. These changes and evolution is leading to a lot of intraday volatility in currency markets, with major pairs in a pattern of trade that has few clean breaks from price action ranges that go on to hold without completely reversing.