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The US dollar index firmed broadly during the end of the month price close to October, hinting that investor demand for the greenback is extremely robust going into this week’s FOMC policy meeting.
We should also consider the EURUSD pair. The single currency started to sink against the buck last week, totally reversing the euros gains after the European Central Bank policy meeting.
Traders should consider that the EURUSD pair makes up a huge basket of the US dollar index, and as such more euro weakness this week could turbo charge the buck much higher.
Without a doubt, the main event for traders will be the FOMC decision this week, where the US central bank is expected to announce the timing for tapering, but not interest rates increases to come.
Everything is set for more US dollar gains this week, but we do need to bear in mind that markets are rarely straightforward, and it is unlikely to be a straight run higher for the greenback.
Hypothetically, the US dollar index could tackle the 96.00 level if the 94.00 support area continues to hold firm. Much will depend this week on whether bulls can break past the 2020 high.
Ideally, we need to see a big bearish sentiment bias forming for a major upside break to ensue. Traders turning wholesale bearish would be a great sign that the move higher is set to continue.
The ActivTrader market sentiment tool is showing that some 77 percent of traders are bullish towards the US dollar index. This is a concern and speaks to the fact the run higher could come to an end sooner than most people think.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, the technical looks good, with the US dollar trading 94.00 level technical zone, and appearing to be on the way to forming a large reversal pattern.
According to technical analysis the drop to 93.30 and subsequent recover towards the highs of the year could mean that an inverted head and shoulders pattern with a target of 96.00 is forming.
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US Dollar Index Medium-term Technical Analysis
The medium-term picture for the US dollar index looks to be very bullish above the 94.60 level, and particularly if a breakout above the top end of the price range takes place.
Make no mistake, a major range break above the 2020 highs could cause a surge equal size to the range break and turbo change the buck, much, much higher towards the 96.00 to 98.00 area.
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