US Dollar Outperforms Again, but Key Resistance Holds. USD/JPY Looks More Interesting

US Dollar, DXY, USD/JPY, IGCS – Technical Update:

• The US Dollar had its best 2-day performance since early March
• DXY still remains below a key trendline after a Bullish Engulfing
• USD/JPY made breakout progress, but IGCS offers bearish warning

US Dollar Technical Setup

The DXY Dollar Index rose 0.51% on Monday after a solid 0.57% rally on Friday. This made the 1.08% rise over the past 2 trading days the most over 48 hours since early March. As highlighted in my weekly outlook, the USD’s performance from a technical standpoint does not seem like it was out of the blue.

Last week, the dollar fell to the critical 100.82 – 101.29 support zone that was reinforced back in February. At the same time, positive RSI divergence was showing that downside momentum was fading. This can at times precede a turn higher. Over the past 2 days, the currency was unable to clear this zone and instead, reversed higher. Could this be the starting point of an extended bullish move?

At this stage, it seems too early to tell. A Bullish Engulfing emerged at the close of last week looking at the daily chart below. Since then, there has been cautious upside follow-through. But, the near-term falling trendline from March remains in play and is holding as resistance. Confirming a breakout above that could offer an increasingly upside technical bias.

That would place the focus on the 100-day Simple Moving Average (SMA). This line held as key resistance in early March, maintaining the broader downside bias. It could very well do so again if prices continue higher in the coming days.

DXY Daily Chart – Watch the Trendline

Chart Created in TradingView

USD/JPY Daily Chart – Watch the 100-Day SMA

Focusing on USD/JPY, the US Dollar has made upside progress beyond the 100-day SMA. That has exposed the March high, which is just below 138.17. Not only that but also prices have closed at the highest in over a month. Meanwhile, a rising trendline from the beginning of this year is slowly guiding the exchange rate higher. In the event of a turn lower, this line could maintain the near-term upside bias.

Chart Created in TradingView

USD/JPY Sentiment Analysis (IGCS) – Bearish

We can look at IG Client Sentiment (IGCS) to see how retail traders have been positioning themselves in USD/JPY. At the time of publishing, about 38% of them were net-long the exchange rate. IGCS typically functions as a contrarian indicator. As such, since most people are net-short, this hints prices may continue rising. But, upside exposure increased by 7.79% and 11.02% compared to yesterday and last week, respectively. As such, recent changes in exposure warn that prices may turn lower instead.

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or@ddubrovskyFXon Twitter