The US dollar index has started to rise again due to hawkish rhetoric towards rates from Fed members. and an expectation that the Federal Reserve are going back into a more aggressive rate hike mode.
Last week’s high PCE inflation number also set about the notion that the Fed are about to do a U-turn. A number of key Fed officials also came out swinging for the fences last week.
For example, Fed member Collins said, “More rate hikes needed to deal with ‘too high’ inflation” and “the US central bank will need to get rates up and potentially hold them there for a long period”.
Despite being somewhat optimistic that the Fed can get inflation down and achieve a soft landing negative economic outcomes are another reason why traders could continue to flock back into the buck.
Technical analysis also shows some really interesting developments right now. The US dollar index is fast approaching its 200-day moving average, meaning a medium-term trend test is underway.
Interestingly, the US dollar index is also trading well above its 200-week and 50-week moving averages. Meaning a bullish crossover is underway and also the long-term trend therefore remains higher.
This is also confirmed by sentiment analysis, as it shows a huge majority of traders are very long the US dollar index, which likely means the need to be cautious right now.
According to the ActivTrader Market Sentiment tool some 82% of traders are bullish towards the US dollar index, which certainly hints that bulls could be in for some pain this week.
Overall, with retail traders still positive we are probably going to see the US dollar index heading lower. Although the pace of this week’s decline is pretty significant already.
US dollar index Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the US dollar index has formed a bullish reversal pattern and is about to break above its short-term rage. The price is likely to see an immediate upwards price surge towards the 106.00 area once 106.00 is cleared.
I would be inclined to look for a short-term move towards the 108.00 level based upon the overall size of the mentioned range break between the 100.00 to 105.00 levels.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar index is fast approaching its 200-day moving average.
For now, in order for the downtrend in the US dollar index to really stick technically, we probably need to see the 106.00 area defended. Please also remember the US dollar index trades above all of its key weekly moving average.