US Dollar Index (DX) Futures Analysis – February 25, 2013

The March U.S. Dollar surged to its highest level since November 16 early in the session, but shortly before the New York Forex opening, the index is trading lower. The current chart pattern suggests a closing price reversal top is forming. This could signal the start of a 2 to 3 day break.

The initial rally was triggered by two overnight events. Firstly, speculation Haruhiko Kuroda would be chosen to become the next central bank governor was the catalyst behind a rise in the USD/JPY. Traders sold the Yen on the premise that Kuroda would implement an aggressive monetary easing program. Secondly, the British Pound continued its slide against the dollar after Moody’s cut the U.K.’s rating by one level to Aa1.

Later in the session, both the British Pound and the Japanese Yen are posting rebounds versus the U.S. Dollar. Oversold conditions are the primary reasons for these reversals. The EUR/USD is showing solid gains in a positive reaction to the Italian election results. This is helping to boost global equity markets and demand for higher risk. Both the Australian Dollar and New Zealand Dollar are also reacting positively to the greater demand for higher-yielding assets.

Technically, the March U.S. Dollar index took out the November 16 top at 81.70. The rally to 81.75 was mild, suggesting that it was probably accomplished through buy stops rather than new buying.

The market is currently forming a closing price reversal top. If it closes lower then look for a follow-through break on Tuesday and the start of a 2 to 3 day correction.  Based on the short-term range of 79.91 to 81.75, the best downside target is a retracement zone at 80.83 to 80.61. A test of an uptrending Gann angle at 80.79 today could trigger a technical bounce.

Day-traders should watch for a possible intraday short-covering rally because of oversold conditions. Currently, the session’s range is 81.74 to 81.25. This makes the market vulnerable to a snapback rally to 81.50.