US Dollar Index Continuous Contract (DX2.F) & Dow Jones Industrial Average (DJI.I)

As we wind down the last days of August, with kids heading back to school and office culture fully resuming, brokers are gearing up for an exciting fall session in the markets. With elections on the horizon and a Federal Reserve that appears to be in the midst of a pivot, there is much to consider. At the recent Jackson Hole Symposium, Fed Chair Jerome Powell suggested that it might be time for a shift in monetary policy and the possibility of cutting interest rates. The markets, having had a stellar performance, seem torn between the excitement of lower borrowing costs and enhanced liquidity, and the caution that comes with the Fed’s signals of potential economic weakening. Major economies, like China, are still struggling, and ongoing geopolitical conflicts add to the uncertainty. This environment has maintained strong demand for precious metals and large-cap stocks, while also affecting financially sound small and mid-cap American stocks, which are expected to benefit from reduced borrowing cost pressures. Emerging markets, excluding China, continue to participate, though MPOX has dampened prospects in Africa and has Europe on edge. With the prospect of lower interest rates on the horizon in the US, we will examine the US Dollar Continuous Contract to understand what may lie ahead for the US dollar, as lower interest rates tend to weaken the currency. It has also been quite a while since our last update on the Dow Jones Industrial Average index (DJI.I), which we last reviewed on July 27, 2023. Let’s take a look at the current price action of this US index to see what lies ahead.

The U.S. Dollar Index is a relative measure of the U.S. dollar's (USD) strength against a basket of six influential currencies, including the Euro, Pound, Yen, Canadian Dollar, Swedish Krona, and Swiss Franc. This week, the U.S. dollar index hit an eight-month low, and prices are trending lower. Over the past 12 months, the price of the DX2.F has decreased with a negative return of 3.46% over the past month, -4.00% over the past 3 months, -2.85% over the past 6 months, and -3.42% over the past year. The path of least resistance for the DX2.F in the near term will likely remain sideways to lower. Gold, which we commented on last week, is charging to fresh all-time highs. Typically, gold and the US dollar act inversely to each other, so it is not surprising to see weakness in the US dollar.Looking at the attached point-and-figure chart of DX2.F at a 1% scale (GC.F), we see a significant break in support that recently occurred at the $100.62 level. This level held three times prior, in May 2022, January 2023, and December 2023, but has now broken below it. Upcoming support is at approximately $98.64, which coincides with the price it reached in July 2023 and the long-term uptrend line, signified by the green uptrend line. It will be interesting to see if the US dollar index can hold this upcoming price level. If it doesn’t manage to hold $98.64, the next level of support can be found in the $92.92 to $93.85 range. If it reverses to the upside, resistance is at $104.71, and above that, $106.81. With an SMAX score of 3 out of 10, DX2.F is not showing much strength against other asset classes.

The Dow Jones Industrial Average is a 30 mega-cap stock index. The Dow Industrials, weighted towards more mature companies in cyclical and traditional sectors with international exposure, had been strong for much of the year. This signals that bullish capital is no longer concentrated solely in Technology and Communications; other sectors such as Industrials, Consumer Products, Financials, and Utilities are starting to soar. This may not be surprising given the weakness in the USD, as Dow companies with international exposure benefit from a weaker USD due to a tailwind from exports.Looking at the point-and-figure chart at a 2% scale, we see a very strong move with a rising column of 12 X’s that began in November of last year without even a 3-box reversal. What is interesting is that even the larger S&P 500 index experienced a 3-box reversal on its 2% chart earlier this month before rebounding. This indicates that the Dow is showing a lot more resiliency during market volatility. DJI.I is continually charging to fresh new highs, so upcoming resistance could be quickly approaching at the 42,876.10 level, and above that, 46,410.47 based on a measured move. On a pullback, support can be found at its 3-box reversal of 38,072.75 and, below that, 36,594.34. With an SMAX score of 9 out of 10, DJI.I is exhibiting near-term strength against other asset classes.