If technical indicators are to be trusted, then the dollar looks to be on the verge of a prolonged downturn. After tracing a “double top,” the Bloomberg dollar index has broken down out of a so-called wedged pattern while also approaching the 38.2% retracement level of its 2014-2016 rally.
Among chart watchers, a double-top pattern usually signals the end of a longer-term bullish trend and is market by two rising peaks in a given security, while a wedge pattern can indicate a continuing trend. In this case, it represents the extension of recent weakness in the buck.
The dollar’s slump also comes after it twice tested and rejected a 23.6% retracement, or reversal, of that historic rally. Bespoke illustrates these moves in the chart above.
If the Bloomberg index breaks below its 38.2% retracement, the next likely resistance level would be 50%, or 3.3% below its current level, followed by the 61.8% retracement. That is 5.9% below its current level.
If that happens, expect Treasury yields to rise and commodities like crude oil to continue climbing, and emerging-market assets to benefit.
