The U.S. Dollar Faces a Technical Indicator: The Death Cross

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The performance of the U.S. dollar against other major currencies is currently being closely monitored as it approaches a potentially negative technical development known as a “death cross” on the daily price charts.

The ICE U.S. Dollar Index DXY, which tracks the currency against a basket of six major rivals, is currently trading around 102.16. While it is down 0.1% for the day, it has still managed to gain approximately 0.8% since the beginning of the year.

The current price action has put the index’s 50-day moving average on a path that could cause it to meet or dip below its 200-day moving average, which is around 103.40. This would trigger a death cross, indicating a potential shift towards a negative trend.

It is worth noting that death crosses are often viewed with skepticism by forex analysts, as they tend to confirm downtrends that are already established rather than provide a strong signal on their own. Back in late September, the DXY experienced a “golden cross,” which is a positive indicator that occurs when the 50-day moving average rises above the 200-day average.

Historical data stretching back to 1985 reveals that death crosses have generally resulted in a decline in the index over the subsequent 1-, 3-, and 6-month periods. According to Dow Jones Market Data, following a death cross, the DXY typically decreased by a median of 1.2% over the next month, 1% over three months, and 0.4% over six months. These declines occurred 60% of the time over one and three-month periods and 52% of the time over six months.

Despite this historical pattern, many experts question the predictive power of death crosses. Brad Bechtel, global head of FX at Jefferies, refers to them as “a relatively meaningless indicator” with little value in terms of forecasting. Similarly, Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, highlights that a death cross does not necessarily guarantee a prolonged decline for the U.S. dollar and suggests the possibility of a positive correction.

In December, the U.S. dollar experienced a significant sell-off as investors factored in expectations of multiple rate cuts by the Federal Reserve in 2024.

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