Chart Of The Day: What Would Send The U.S. Dollar To 118

The dollar retreated 0.15% as China considered reducing inbound quarantine to 7 from 10 days. The greenback's slide followed Wednesday's 0.75% jump, the sharpest advance in a week, as soaring UK inflation reawoke interest rates concerns. The cost of food in the UK surged 14.6% annually in September, the strongest advance in 42 years. Overall inflation jumped 10.1% from 9.9%, with momentum likely pushing it further. The pound sterling dropped 0.9% for the second day and an overall selloff of 1.25%.

I don't expect the current decline in the dollar will persist and is but a short-term response to the possibility of a shorter Chinese quarantine. Bearish bets on Asian currencies continued in light of the consistently ultra-hawkish Federal Reserve, forcing other central banks to keep up. The dollar crossed the dramatic 150 level against the yen for the first time since August 1990 and registered an all-time high against the Indian rupee at 83.268.

The dollar also enjoyed the support of rising yields, with the 10-year note reaching 4.178% for the first time since June 2008. Conversely, gold came within 0.5% of the September 28 low of $1,618, not seen since April 2020, and I expect gold to fall toward $1,300.

Dollar Index Daily

The US currency is forming a pennant, bullish following the 500 pip jump in just five days. Traders are locked in profits, which requires selling the position. However, ongoing demand supported the contract, keeping it within its rising channel. An upside breakout will complete the pattern, demonstrating that demand continues to outpace supply. The penetration will likely put a technical chain reaction in place, in which a short squeeze compounded by triggered longs will catapult the price another leg up. When the short squeeze ends, the dollar's rise will ease, perhaps even fall. However, when the pattern provides support, it will confirm the uptrend, going for a second leg up and, at this point, attracting more upward speculation.

Trading Strategies

Conservative traders should wait for the upside breakout to close above 114 and then for a return move to demonstrate ongoing support before risking an extended position.

Moderate traders would be content with an intraday penetration of 114.00 and await a pullback for a better entry, if not for confirmation.

Aggressive traders could go long with a close above the pattern.

Trade Samples - Long Positions

Aggressive

• Entry: 113.25
• Stop-Loss: 112.25
• Risk: 100 pips
• Target: 117.25
• Reward: 400 pips
• Risk-Reward Ratio: 1:4

Moderate

• Entry: 113.25 (after penetrating 114.00)
• Stop-Loss: 111.75
• Risk: 150 pips
• Target: 117.75
• Reward: 450 pips
• Risk-Reward Ratio: 1:3

Conservative

• Entry: 113.25 (after closing above 114.00)
• Stop-Loss: 111.75
• Risk: 150 pips
• Target: 117.75
• Reward: 450 pips
• Risk-Reward Ratio: 1:3

Note: These are generic samples. When you incorporate your timing, budget, and temperament, you will achieve superior results statistically, over time. Happy trading!