The dollar has been storming the FX market over the past fortnight, as the previously unloved currency drives higher to the detriment of the likes of the euro, pound, and yen. With the US economy in a particularly strong position and the Federal Reserve (Fed) raising rates at a considerable clip there has long been reason to see the dollar appreciate. That being said, one key determinant of the DXY will be the direction of the euro, given how heavily weighted the dollar index is towards EUR/USD (57.6%).
From a technical perspective, the dollar index lost 15% in 2017, providing an extended bearish market sentiment that markets will find it difficult to shift out of in a hurry. However, looking below, the long-term picture provides a particularly interesting perspective. The monthly chart highlights that the weakness we have seen throughout 2017 was likely a retracement of the dollar rally, seen from the mid-2014 low to the start of 2017. With that perspective, we would want to see a recovery from the 61.8% or 76.4% Fibonacci retracements to build a bullish case. That is exactly what we are seeing, with the price moving higher since engaging with the 61.8% retracement. The confluence of that Fibonacci level alongside an ascending trendline and the 200-month moving average provides good reason to believe we could see a bounce from here.