One of the best technical indicators for me is when I am looking at a Japanese candlestick on a daily or weekly trend, and see a “long wick” as we near a close or an interval. The reason why this is so powerful is because that means that traders were caught a little wrong footed early on, and may have got “caught on the wrong side” and are forced to trade the other direction to cover shorts or liquidate longs. Hence a reversal takes place.
In the case of the USD, the market has definitely been bearish. No signs of letting up…until yesterday’s ECB meeting. This meeting has changed the outlook near term of the EUR and the ECB future policy actions, hence the USD index (which is comprised of about 57% of the index) may be influenced as well. Some pundits will say “the ECB has yet to act” but the market seems to care less since it seems to be caught a little “wrong footed.”
Whether or not the USD can capitalize or not on this recent squeeze or not, will be dependent on central bank activity in the coming weeks. However, 2014 has been the year of the hibernating bull for the USD. Don’t look now, but I think the bull just growled at you!
USD Index Daily chart:
USD Index Weekly
DJ FXCM USD index Weekly (for a little more balanced USD view)
Blake Morrow
Chief Currency Strategist, Wizetrade
Disclaimer: I started buying USD selectively against European currencies post ECB meeting yesterday
Is true that eur/usd is almost 57% of the Dollar Index but you should add usd/chf and usd/sek as these currencies are moving when eur/usd is moving only that in the opposite direction. This makes the euro block (euro + chf + sek) to weight more than 65% on the Dollar Index. If this index is to rise (and at least until June ECB meeting it will) is only because the market have certain expectations from the ECB but not because the USD is strong. The USD will be strong only if it will be sustained by rising yields in the short term US bonds which I don’t see this happening. US Dollar Index rallying is only a fake perception that the USD is strong.