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The US dollar index has started to accelerate to the downside due to expectation that the Democrat party did not do as bad as expected, while some signed have emerged that China is preparing to open the economy.
In this type of environment traders are still looking to other central banks to set the market tone. If this is the case the Federal Reserve is expected to slow the pace of recent hikes.
Traders could also be cautious about this trade as the FED is expected to hike rates by 50 basis points in December. If this happens the downside in the DXY could dramatically accelerate.
Only a very big upside surprise in this week’s CPI report will upset the applecart this week. In such a scenario the greenback can still recover higher, although the possibility of a major top is still a real and present danger.
We should also consider the technicals are calling for an extended pullback, due the presence of a bearish triple top pattern. The risk is a sudden drop back towards the 109.00 area.
For now, in order for the uptrend in the US dollar index to really stick technically, we probably need to see the 109.00 area defended. This is former breakout resistance now turned support.
According to the ActivTrader Market Sentiment tool some 65% of traders are bullish towards the US dollar index, which certainly hints that bulls could be in for more 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 a bearish head and shoulders pattern is starting to play out. The pattern has not yet broken neckline support or 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. The short-term trend is now bearish.
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US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar has tested the bottom of a falling price channel, 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 if the channel is broken. If this remains defended then expect an explosive move back towards the 113.00 level where the top of the channel is located.
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