The US dollar index has started to move under a large wedge pattern threatening a technical meltdown after Thursday’s Producer Price Inflation Index number came in weaker than expected.
Market reacted by selling the greenback as the PPI number further complimented the weak CPI reading in July. Markets are now expecting that the Fed will start to act less aggressively regarding rates.
Inside the PPI report for July, it was shown the PPI excluding food and energy rose by 0.2%, which was much better than the expected 0.4% rise. Additionally, normal PPI, which includes food and energy contracted.
The monthly headline reading of -0.5% month on month send the US dollar index crashing, and as mentioned earlier the technical set-up for the US dollar index looks like one of more short-term weakness ahead.
I expect that US dollar weakness will be the dominant theme going into Jackson Hole. The meeting is two-weeks away and I think that over this time the sell the greenback trade could accelerate.
According to the ActivTrader Market Sentiment tool a whopping 61% of traders are bearish towards the US dollar index, which strongly hints that the losses in the greenback could be about to slow.
However, it should be noted that nearly 80% of traders were long the US dollar index in early week trade. I think it’s possible that a monumental, long squeeze is also underway, and the downside could also accelerate.
US dollar index Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the US dollar index has invalidated a large, inverted head and shoulders pattern. This is a very bearish sign technically.
According to the overall size of the bullish reversal pattern being invalidated, it shows that the US dollar index could be preparing to stage a move towards the 103.00 support area.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar index has started to trade under its 50-period moving average, which means that a sell signal is now generated, and the 100-day or 200-day moving average could be the next target.
Additionally, a massive wedge breakout is underway. The wedge breakout looks particularly bearish for the US dollar index, and we could well see more weakness coming.