The U.S. dollar has been falling and is approaching a key support level. A breach of this key support level, which the price has traded above since the start of 2015, would indicate that a long-term downtrend in the U.S. dollar is under way. However, if the dollar is able to bounce off support, like it did in mid-2016, it would indicate that the current range is continuing and that the price could rally back toward the 2015 and 2016 highs.

The PowerShares DB US Dollar Index Bullish Fund (UUP) surged above $24 in 2015 and has not closed below that level since, despite a few attempts. The intraday low point over the past 32 months is $23.96. That was in mid-2016, and then the exchange-traded fund (ETF) surged higher from there until the end of the year. In 2017, the price has declined back to that pivotal $24 region. (See also: The PowerShares ETF UUP: An ETF for Dollar Bulls.)

The PowerShares ETF – which tracks the U.S. dollar relative to a basket of currencies – has been in a large range over the past 32 months, oscillating between $24 and resistance at $26.50 to $26.83. If the price keeps declining and closes much below $24, this would suggest that the range is over and that a long-term downtrend is under way. Based on the size of the range (subtracted from the breakout price), the approximate downside target is $21.50. On the other hand, if the price is able to bounce off support, like it did in mid-2016, traders could expect a rally to $25.50 or above (about the mid-way point of the range).

Technical chart showing the PowerShares DB US Dollar Index Bullish Fund (UUP) near a major long-term support level

The CurrencyShares Euro Trust (FXE) shows how the euro is moving relative to the U.S. dollar. While the dollar has declined in 2017, the euro has rallied. On Aug. 2, the CurrencyShares Euro ETF hit its highest level since early 2015. But this is also a resistance area for the euro – $112.70 to $114.81 is a resistance zone that has batted the price lower a number of times over the past two and a half years. (See also: Currency ETF Hits New 52-Week High.)

A breakout for FXE above that resistance zone would indicate that the euro is in a long-term uptrend, with a target between $122 and $128 (depending on the breakout point and the size of the range used, since the range is not uniform). To help confirm the uptrend in FXE, UUP should continue to fall. If FXE starts to retreat from this resistance area, traders could expect a decline back below $107.50 (about the mid-way point of the range). If FXE does begin to fall, confirmation would likely be provided by a rallying UUP.

Technical chart showing the CurrencyShares Euro Trust (FXE) near a major long-term resistance level

The Bottom Line

The U.S. dollar (relative to six major currencies) is at a critical level, and so is the euro relative to the U.S. dollar. The two ETFs can be used to help confirm trades in the other. If UUP declines below support, traders should expect FXE to keep rallying. If UUP bounces, FXE is likely to decline. The long-term implications are significant at these levels. A breakout means a new trend is under way, while a failure to break out means the long-term ranges could be continuing. (For additional reading, check out: ETFs to Buy or Avoid After Strong Q2 GDP.)

Charts courtesy of Disclosure: The author does not have positions in U.S. dollar or euro ETFs or forex pairs at the time of writing.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.