FX Weekly: EUR/USD V DXY 40 and 50 Year Averages

When DXY broke its 5 year average at 95.00’s in February 2022, the target and top was located at 99.00’s and 100.00. A Trade from a 5 year average only contains ability to travel 400 to 600 pips depending on the currency pair.

EUR/USD for example broke its 5 year average in November 2021 to target 108.00’s and a 600 pip trade vs 400 to 500 for DXY. AUD/USD broke its 5 year average at 0.7200’s in April 2022 and traded 600 pips to 0.6600’s. NZD/USD also broke below its 5 year average in April 2022 at 0.6600’s and traded 600 pip lows to 0.6000’s. USD/CHF broke above 0.9500’s in April 2021 and traded 500 pips while GBP/USD broke below 1.3000’s and traded 1500 pips.

DXY decided to travel 900 pips higher from the 100.00 target and EUR/USD traded 900 pips lower from 108 to 0.9900 lows. What allowed an extra 900 pips higher to DXY from 100 was the 40 to 50 year monthly averages at 96.00’s to cross above the 5 year. This February 2022 event was powerful and added a 1400 pip distance to allow DXY to travel to 109.00’s.

While DXY and EUR/USD contained Doji monthly candles February 2022, EUR/USD as leader currency broke its 5 year average at 1.1400’s in November 2021 and continued to 0.9900 lows. DXY was and remains the currency market story today as the break above 40 and 50 year monthly averages at 96.00’s determined how far all currency pairs would travel on the next journey.

DXY’s clean break at 96.00’s for example informed the EUR/USD 1.0800 target was just the beginning to the downtrend while USD/JPY went ballistic in March 2022 and traded 1100 pips from 114.00 to 125.00’s then another 1000 pips from 121.00 to 131.00’s in April 2022. USD/JPY today trades 140.00’s.

DXY break at 96.00’s offered the ability for GBP/USD, AUD/USD, NZD/USD to travel lower and break 5 year averages while USD/CHF broke and traveled higher. April was the deciding factor for many currency pairs and a full 2 months from the DXY break in February.

If DXY held at 96.00’s the currency market story today would be quite different. How rare is such an event is highlighted by 600 data points of monthly averages dated to 1972 as DXY triple digits closed 173 monthly averages or 28% within the life of DXY.

The break further informs EUR/USD monthly averages from 40 to 50 years must be close at 1.1400’s as DXY and EUR/USD trade the exact same 1400 pips from 5 year averages. For every action requires an equal and opposite reaction from 2 opposite currency pairs.

DXY informs not only deeply overbought but the top is located from 109.00’s to exactly 111.55. To move higher requires slow long dated averages to move higher. Not only averages inform to massive overbought but DXY varied an extraordinary almost 7%. Inside DXY’s price is far to much variation and required is noise to massively rise to normal levels.

DXY first break to averages is located at 99.67 and a full 1000 pips from current 109.00 price. DXY still trades within 200 pip ranges from 109.00 to 107.00’s, and 107.00’s to 105.00’s. For the week watch 109.15 then 107.31.

The strategy moving forward is a continuation to long EUR/USD, GBP/USD, AUD/USD, NZD/USD and short USD/JPY and JPY cross pairs to include CHF/JPY. A lower DXY warrants a rise in stock markets, WTI and OIL and all risk assets.

Brian Twomey

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