DXY trend: Looking at the trend of the US Dollar index (DXY) is very important to gauge the movement of Bullions and Base Metals, as these have an inverse relationship to this trend. While Bullions still account for other Geopolitical situations while factoring in the prices, Base Metals have a distinctly inverse relationship with the US Dollar index.
US Federal Bank’s Policy: In the last one and a half years, we saw the Dollar’s demise on the back of the US Federal Bank’s monetary policy. Weaker Dollar boosted base metal prices. In the wake of that, the US Dollar index seems to have taken greater support close to the level of 89.00 and has bounced back towards 93.73. In the September meeting of the US Fed, we got an indication that we could see tapering as well as a rise in interest rates on the back of economic recovery going forward. Thus, it becomes crucial to look at the DXY structure.
Elliott wave: The monthly chart of DXY marks the Elliott wave pattern. In the period from 2011 to 2017, prices rose from the lows near 74.00 to 103.85 levels. This price action exhibited impulsive behavior as marked by (1-2-3-4-5). This rise has completed the intermediate wave (A) of the Zigzag correction pattern and post that intermediate wave (B) is ongoing which is probably forming a ‘Triangle Pattern’ as indicated by the grey lines. This wave (B) has taken support close to the 50% retracement level of the prior rise.
US Dollar Index (DXY) Monthly chart:
Triangle Pattern: The structure of intermediate wave (B) suggests minor wave C has completed and wave D has started which is likely to move towards the black trendline resistance.
Bollinger Bands: DXY is on the verge of crossing above the main line (moving average) of the Bollinger Bands for the first time in 17 months. This indirectly suggests that prices are about to break above their average of the last 20 months.
MACD Positive crossover: We have marked the previous occasions when buy signals were generated in MACD. Most of the times in the past this signal worked out brilliantly, and now once again it has provided a bullish signal which supports our outlook.
Now let’s dig a little deeper and look into the weekly chart which shows the formation of the “Double Bottom Pattern”. There is more validity of this pattern as it has formed after a sustainable downtrend. Bollinger Bands have also started to tilt on the upside and prices have started to sustain above the middle band, which is a bullish sign. Now, any monthly close above 94.00 will lead to a breakout from this pattern and suggest a target towards 97.50 level.
US Dollar Index (DXY) Weekly chart:
In short, considering the shift in the US Federal bank’s monetary policy as well as the overall structure of DXY, the US Dollar index (DXY) has formed crucial lows at 89.00 levels and a break above 94.00 will provide further confirmation of the bullish scenario for the move towards 97.50 levels at least. Overall wave D target can be expected in the range of 101.50 -102.00 levels which is finally not a good sign for Base Metals as well as Bullions to some extent. This scenario will remain valid as long as the crucial support of 89.00 is protected.