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The US dollar index has started to recover after suffering its biggest weekly sell-off last week, due to the thinking that the Fed may be about to step back from hiking aggressively due to the weakening economic picture.
It remains to be seen whether the Fed will step back from hawkish rhetoric. Recently we have seen some dissent amongst Fed members who have become uncomfortable with the pace of recent hikes.
A big drop in US consumer confidence to a three-year low and the big drop in the US service PMI have helped to perpetuate the notion that the Fed is about to step back and go towards 50 and 25 basis points hikes.
Traders could also be cautious about this trade as the Fed is expected to hike rates by 75 basis points next week. If they Fed don’t sound dovish then expect the DXY to dramatically accelerate higher.
We should also consider the technically things are setting up for a big reversal or a big drop. The risk is a move under the 109.00 level this week could cause. sudden drop back towards the DXY’s 200-day moving average.
For now, in order for the uptrend in the US dollar index to really stick technically, we probably need to see the 109.20 to 109.00 area defended. This is former breakout resistance now turned support.
According to the ActivTrader Market Sentiment tool some 46% of traders are bullish towards the US dollar index, this is a big drop in bullish sentiment since last week.
Overall, with retail traders are turning negative and we are probably going to see the US dollar index heading lower in this instance. 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 a bearish triple top pattern is starting to play out. The pattern has not yet met its upwards price target.
The mentioned time frame is also showing a clear break under the US dollar index’s 200-period moving average. This is a very negative technical sign. Watch the 111.70 level this week, this is the 200-period moving average.
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US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar has ignited a huge bullish reversal pattern, however, we could soon see a retest of this former key breakout area.
I expect more downside towards the breakout zone if the 109.00 level is broken. If this remains defended then expect an explosive move back towards the 114.00 level.
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