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The US dollar index is starting to show signs of forming a major market top, despite the fundamentals showing positive signs of no recession, still the latest drop in inflation pushes back on future rate expectations.
Yesterday’s CPI data was indicative of a rapid cooling in inflationary pressures in the world’s largest economy, however, the slower declines in core inflation readings mean the Federal Reserve will not be dissuaded from raising interest rates on at least one more occasion.
The Federal Reserve officials do appear on track to stop their run of interest-rate hikes when they meet after the July decision, marking a clear divergence from other major central banks.
Fed policy makers are likely to take note that there was relief in policymakers’ preferred measure which tracks core services ex. rent of shelter prices and is a better gauge of underlying price pressures tied to demand.
That measure showed a -0.01% m/m pace in June, a sign that past rate hikes are starting to work to cool inflation, this is likely to keep the buck on the backfoot going forward.
Sentiment analysis is also a worry for bulls as it shows a small majority of traders are long the US dollar index, which likely means the need to be cautious right now. This could spell more gains for the buck.
According to the ActivTrader Market Sentiment tool some 92% of traders are bullish towards the US dollar index, which does provide a hint that bears could be in for some pain this week.
Overall, with retail traders remaining very confidence we are probably going to see the US dollar index heading lower. Also, the technicals are starting to agree with the sentiment dynamic.
US dollar index Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the US dollar index is issuing a strong sell signal after crashing through from the bottom of the Ichimoku Cloud and breaking the key lows.
I would be inclined to look for a short-term move towards the 98.00 area and complete rewinding of any gains in the Index. Watch out for a break of 100.00 to confirm the breakout.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that a major sell signal has just been issued, with the Lagging Line moving under the Ichimoku Cloud for the first time this month.
Therefore the US dollar looks primed for a major sell-off in the medium-term. Watch out for a coming collapse and test of the US dollar index’s next major support zone, around the 98.00 level.
