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The US dollar index staged a huge breakout above the 93.75 resistance level last week as move in bond yields caused currency traders to flock back into the greenback due to fears of growing inflation.
This week is likely to be pivotal for the US dollar, with the Non-farm payrolls job report likely to be the central focus for currency traders as a weak or strong number could determine the FED’s next move in regard to tapering.
Should we see a soft jobs number it will make it difficult for the FED to taper QE, and we would likely see a strong sell-off in the US dollar index. A strong number may prompt an important test of the September 2020 trading.
Looking at the breakout, the US dollar index has staged an impressive breakout, however, bulls still have much work to do in order to surpass the 94.80, which marks a multi-year range top for the buck. Overall, the movement around the 94.80 level should determine the fate of the buck this month.
The ActivTrader market sentiment tool is showing that some 84 percent of traders are bearish towards the US dollar index, which is a big rise in bearish sentiment considering traders were not bullish towards the greenback as little as two-weeks ago.
Ideally, we need to see traders turning bullish towards the greenback right at the top of its multi-year trading range, around the 94.80. This would be a great sign that a bearish correction or reversal is coming.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, immediate danger is large amount of negative price divergence has formed during the US dollar index’s epic run above the 94.00 handle last week.
Reliable divergence indicators, such as the MACD, RSI, and Momentum are all showing negative price divergence has formed down towards the 93.50 area. Watch out for a big correction if the US dollar stalls.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame the most striking thing I can see is that the US dollar index is test towards the top of its two-year trading range, making this week pivotal for the greenback.
Failure to move above the range could spark a huge sell-off towards the bottom of the range, while a breakout above the top of the range, 94.80, could cause a major bullish in the US dollar index towards the 96.00 area.
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