The US dollar index has started to rise again due to rising inflation and a number of Fed members coming out with hawkish rhetoric towards rates, hinting at a 50-basis point hike in the next week.
The US CPI report was the major last week. CPI remains more than three times above the Fed’s 2% target and continues to point to a broad-based advance on the general price level, particularly services, and housing.
On the fundamental front, I think the worsening situation in Ukraine and a major correction in stocks are going to see a continuation of US dollar strength in the coming.
Technically, the US dollar has got the greenlight to really rally now as support is breaking on the GBPUSD and EURUSD pairs. I think FX could see some huge moves over the coming weeks.
Also, the notion that the major central banks are behind the FED could really be a hot trade if the BOE and ECB slow hiking and the FED simply accelerates over the coming meetings.
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 88% 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 key trendline resistance. The price is likely to see an immediate upwards price surge towards the 106.00 area.
I would be inclined to look for a short-term move towards the 105.00 area and complete rewinding of the negative price divergence seen across the mentioned time frame until the 108.00 level.
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.