The US Dollar Index (DXY) continued its counter-trend recovery, extending Friday’s bullish engulfment pattern. Reclaiming 76.709 (October 25th swing low) hints of the completion of impulsive weakness originating from the June high. There is still a strong chance of developing a 5-wave ending diagonal, given the position of the (Elliot) wave count. Either way, a typical correction target projects a move to the vicinity of the previous wave’s peak, which in this case lies above the 78 handle. Bullish diverging daily studies also suggest further strength for the greenback. Meanwhile, Monday’s inability to clear the 20-day moving average is somewhat of a concern for dollar bulls. A rejection at this key resistance could trigger a temporary setback. Trading back below the 76 region would increase the probability of resuming weakness towards the 2009 low.
While the Swedish Kroner was the weakest performing component, widening credit default spreads have triggered headline risk for the EUR/USD. The second day of counter-trend price action suggests a possible move to 1.37, given bearish diverging daily studies.
The USD/JPY continues to flirt with the 20-day moving average. Only a daily close above this key resistance will suggest further strength towards the important 50-day moving average. Meanwhile, a bearish rejection could spell another shot at the psychological JPY80 level.
