The US Dollar Index (DXY) steadied around 102.10 on Tuesday after modest gains a day earlier, having retreated from an almost 18-month high during European hours. Price action remains above the nine-day and 50-day Exponential Moving Averages (EMAs), while the 14-day Relative Strength Index (RSI) sits near 75.6, pointing to overbought conditions even as the broader uptrend holds. On the daily chart, the index is rising within an ascending wedge pattern, a formation that can allow further near-term upside but also leaves scope for a reversal or correction if the structure fails.
Resistance is seen at the 18-month peak of 102.53 set on 6 October, and then at the wedge’s upper boundary near 102.80. Support levels cluster around the wedge floor at roughly 101.70 and the nine-day EMA at 101.60; a break beneath that area would shift focus to the 50-day EMA at 100.37, and then the four-month low of 98.56 recorded on 20 August. Separately, US services indicators showed the ISM services index easing to 54.9 from 55.4, compared with a 55.0 consensus, while business activity and new orders softened as employment, order backlogs and prices paid strengthened.
Short-Term Dollar Bullishness and Risk Management
With the US Dollar Index holding steady around 102.10 and trading above key moving averages, we believe derivative traders should lean into the short-term bullish momentum. Buyers can look to target the immediate resistance at 102.53 and potentially the upper wedge boundary at 102.80. However, with the 14-day RSI sitting at a highly overbought 75.6, we must remain cautious of a sudden pullback.
To manage this risk, we suggest preparing downside protection, such as put options, just below the lower boundary support of 101.70. A breakdown below the nine-day EMA of 101.60 would invalidate the bullish structure and likely trigger a rapid slide toward the 50-day EMA at 100.37. If selling momentum intensifies, we could see the index eventually testing the previous multi-month low of 98.56.
Strategy Alignment With Fundamentals and Market Outlook
This trading strategy aligns with fundamental data showing the US services sector expanding solidly at 54.9, proving that domestic demand remains resilient. Historically, similar economic backdrops have allowed the Federal Reserve to maintain a cautious stance on rate cuts, which has historically kept the greenback supported. In past market cycles, a strong services sector paired with rising input prices has driven the dollar index to sustain gains for several weeks before any major correction occurs.
In the coming weeks, we advise traders to utilize range-bound strategies, buying the dips near support while scaling back long positions as we approach the wedge apex. Monitoring upcoming macroeconomic releases, specifically jobs data and inflation metrics, will be crucial for timing these entries. Balancing short-term call options with protective puts will help us navigate the expected volatility without being caught on the wrong side of a sudden breakout.
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