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The US dollar index has started to rise again due to hawkish rhetoric towards rates and an expectation that the Federal Reserve is going back into a more aggressive rate hike mode.
Basically, the FOMC is data-dependent, thus, the meeting minutes are not expected to reflect the “January surge.” However, the Fed will likely have to turn much more hawkish going forward.
If we see the FOMC being very hawkish today the probability of a very deep drawdown in the S&P500 is now much higher. The FOMC is still likely to be encouraged by the positive inflation data from December 2022, which would fit in the narrative of disinflation.
The FOMC will also acknowledge the weakening labour market in November and December, as the number of temporary workers decreased, and the number of average hours worked decreased – both being the leading indicators.
Really, we need to see the reaction of the market to today’s FOMC minutes. It is likely that a big move in the buck could take place if expectations of a 50-basis point hike are cemented.
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 92% 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 broken above its short-term rage. The price is likely to see an immediate upwards price surge towards the 105.00 area.
I would be inclined to look for a short-term move towards the 106.00 level based upon the overall size of the mentioned range break between the 104.00 to 102.00 levels.
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US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar has broken above its 50-day moving average, so far a death-cross is still underway, but not yet is it in full swing.
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.
A bearish head and shoulders pattern is also still seen with the pattern potential carving out a final right hand should upto the 106.00 to 108.00 area.
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