Sometimes you have to look beyond the market you trade for answers.
Any good currency trader knows that it pays to watch the US stock market, literally.
That’s because the stock market remains the number one risk market.
So figuring out its likely future direction helps you understand where the dollar is going, among other things.
For instance, a rally from indices like the S&P 500 and Dow Jones Industrial Average suggests that risk-on sentiment is alive and well.
The term “risk on” means investors are willing to put capital at risk.
Risk-on moves typically equal a weaker dollar and knowing that can assist you in trading the major currency pairs.
The opposite is also true, where a weak stock market suggests a stronger dollar.
And with the US Dollar Index (DXY) sideways since February 7th, we need all the help we can get in determining the dollar’s next move.
First up is the S&P 500, which we’ll analyze via the SPX500.
We saw the SPX500 break out from its all-time high trend line on January 23rd after trading below it for over a year.
There’s also a large ascending channel that has developed since the October 2022 low.
If we combine that with the potential bull flag that’s developed recently, the S&P 500 still looks relatively bullish.
However, bulls have to clear this 4,140 resistance level first.
The Dow Jones (DJI) is another stock market index offering clues about sentiment.
We saw the DJI close above its November trend line on Monday. However, it’s trading below it now on an intraday basis.
Bulls must defend 34,100 on a daily closing basis to keep the bullish break intact.
If they can do it, we could see the Dow trend higher toward 36,000 while the S&P reaches toward 4,300.
That scenario would push the dollar down and spark bullish momentum for pairs like EURUSD and potentially GBPUSD.
On the other hand, indices like DJI and the S&P breaking key supports would ignite a dollar rally.
So while there’s still work to be done from both sides, using markets like the Dow Jones and S&P 500 can assist with determining risk on/off sentiment and, thus, the dollar’s trajectory.
But it’s all about the DXY at the end of the day.
And until we get a clean break of the 102.60 to 103.60 range, the dollar is directionless.
A convincing close above 103.60 would open up 104.50 and potentially 105.60.
On the other hand, a daily close below 102.60 support would be bearish for the USD and expose 101.60.