The dollar has been a dud among major currencies this year, a scenario that has been limiting upside for the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP). However, some currency market observers believe the greenback is poised to shake off its rust and head higher.
UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Other currencies, including the Australian dollar, yen and Canadian dollar have recently been gaining momentum against the greenback.
Expectations that the Federal Reserve will boost interest rates multiple times this year are prompting some investors to speculate the dollar has more upside ahead of it.
Heading into 2017, many bond market participants were betting the Fed would raise interest rates three times, but some market commentators believe two is the appropriate number of rate hikes this year. The Fed boosted rates in March for the first time this year and the third time in 15 months, but a dovish tone following the March meeting muted the dollar’s reaction.
“While the dollar index did pull back from its post-election highs over the past few months, Rich Ross of Evercore ISI sees a ‘bullish wedge’ that started developing just before the start of 2017. The wedge Ross observes shows the index making higher lows just below 99,” reports CNBC.
Eurozone political volatility, Brexit aftermath and Japan’s overt efforts to weaken the yen indicate the dollar should remain strong against the euro, pound and yen. However, safe-haven bets could spur the yen higher against the dollar, if only for a short while. In reality, the euro rallied in advance of the recent French election and the pound is rebounding this year as markets reconcile Brexit plans.
“Ross says that the wedge is also going toward the 50-week moving average, a trendline that has been gradually moving up this year for the dollar index, which compares the dollar to a basket of major currencies made up primarily of the euro. The technician considers the 50-week moving average ‘support’ for the dollar, meaning he sees the currency bouncing up once the wedge meets the line,” according to CNBC.
For more information on the USD, visit our U.S. dollar category.