The Next Market Move Investors Don’t Expect

The strong rally in the US Dollar since the past year has led to commodity markets selling off as investors pursued the equity markets led by years of accommodative monetary policy in a search for higher yielding assets. However, what goes up must eventually come down and the US Dollar is no different. With the markets trading at extremes the markets are likely to see a correction in the near term as the US Fed prepares for interest rate liftoff this December. Given the current monetary policy conditions and the markets being prepped for a rate hike, there is further upside to the UUP while the price of Gold continues to decline to new multi-year lows.

UUP – Powershares DB US Dollar Index

The UUP Powershares DB ETF which tracks the trade weighted US Dollar Index has gained a further 5.56% on a year-to-date basis, while rallying a massive 18.06% since early 2014. The strong momentum in the US Dollar Index was largely due to the efforts by the US Federal Reserve which deployed the unconventional monetary policy tools, the QE or Quantitative Easing in a bid to stimulate the economy. While the UUP has been on a strong parabolic uptrend, commodity markets have been trending lower, clearly reflecting the deflationary pressures, or rather the lack of inflation.

The UUP touched multi-year highs of 26.50 around March this year as the Fed prepared the markets for a potential rate hike (which got kicked down the calendar and is now slated for an imminent rate hike in December).

UUP recently broke out from its large descending triangle pattern and also closed above the short term support/resistance level at 25.65 – 25.7. Marking the minor trend line connecting the lows of 14th October, 24.43 and 2nd November 25.18, the steep rising trend line will be an important trend line to watch. As long as prices hold above the trend line, UUP could see further upside with the most immediate target coming in at 26.50.