The US dollar index has started the week on the backfoot due to increasing fears about the Fed meeting next month, following the release of softer-than-expected CPI inflation and concern from the FED.
The Federal Reserve officials appear on track to extend their run of interest rate hikes when they meet next month, shrugging off their advisers’ warning of recession with a bet that they need to do a little more to curb inflation.
However, the US dollar is down this week as traders are not convinced, and economic data from the US economy remains weak. Fears about an exodus from the US dollar are also high due to the weakening petrodollar.
Also, the Minutes of last month’s policy meeting showed officials dialled back expectations of how high they’ll need to lift rates after a series of bank collapses roiled markets last month.
Fed officials raised their benchmark lending rate a quarter point to a range of 4.75% to 5%, as they sought to balance the risk of a credit crunch with incoming data showing price pressures remained too high.
Going forward, the fear is that the US dollar index could slip well below the 100.00 level and begin to collapse.
Sentiment analysis is also a worry as it shows the majority of traders are very long on the US dollar index, which likely means the need to be cautious right now. This could spell more losses for the buck.
According to the ActivTrader Market Sentiment tool some 91% 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 is forming bearish lower highs and lower lows, all classic signs that the buck could breakdown.
I would be inclined to look for a short-term move towards the 100.00 area and complete rewinding of the April move higher towards the 102.50 zone. Ichimoku analysis is very bearish.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that a bearish head and shoulders pattern is also still seen with the pattern potential carving out a final right hand around currency levels or right area.
Either way, the US dollar looks primed for a major fall in the medium-term. If the next major down leg under 101.00 happens we could see a major acceleration towards 98.00 and 96.00.