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USD Index Will Not Rise Forever

It has been another strong year for the U.S. dollar. The greenback crushed most of its rival – the euro and especially the pound, to mention a few – so there is no surprise the USD index is hovering near 101.00. The last time the USD index traded around these levels was over 13 years ago – in 2003 – which comes to illustrate just how exceptional the dollar’s rally really is. However, what traders and investors are most interested in, is not the past, but the future, and what is left of that uptrend. Judging from the Elliott Wave analysis of the weekly chart below, not much.
usd index-13-12-16
The weekly chart visualizes the entire behavior of the USD index since the low of 70.70 in March, 2008. We will now focus on the last phase of that recovery, which began from 72.70 in May, 2011. As visible, the impressive surge between that level and 102.05 so far could be seen as a five-wave impulse, whose sub-waves are labeled (1)-(2)-(3)-(4)-(5). Wave (5) is still under construction so higher levels could still be expected. The problem is that according to the Wave Principle, every impulse is followed by three-wave correction in the opposite direction. No matter how we label the surge since 2011 – as wave I or wave (C) – once its fifth wave ends, a decline to at least the support of wave (4) of I/(C) should be anticipated. In terms of price, this translates into a decline to 92.00. If the current uptrend is in its wave (C), the following selloff could be much larger, but we cannot know that right now. The bearish outlook is also supported by the Relative Strength Index, which shows the typical divergence between waves (3) and (5) of I/(C) – another reason not to bet your house on the dollar.
Then, the question is what is left of wave (5) of I/(C)? In order to find out, we need to go into the details and see a daily chart of the USD index.
usd index-daily-13-12-16
Ideally, wave (5) should also be an impulsive pattern. Right now, it does not look like one. Wave 3 is still not over and waves 4 and 5 of (5) also remain to be drawn by the market, before the bearish reversal could occur. In other words, we might see the USD index above 103.00 in the short-term, but overall, the trend since 2011 is approaching its end. Nothing lasts forever.



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