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The US Dollar Index has moved to a new 2021 trading high this week and is continuing to gain strength into the monthly price close. Traders have been on the fence for some time towards the greenback, however, it appears that a new price trend has formed, after the index closed above its 200-day moving average for the first-time since June 2020 this week.
Speaking to analysts, no clear consensus has been formed on the US dollar at the moment. Many market participants are not convinced about the ongoing breakout, so I thought it may be a good time to look at the bull and bear case for US dollar index.
Fundamentals
On the bull side for the fundamentals, we have the fact that the US economy is widely expected to outpace European, Japan, and the UK in terms of growth. Encouraging manufacturing data from the US is also painting a bullish picture for the United States economy in terms of growth.
The $1.9 trillion stimulus package is expected to be a boon for the US economy in the short-term, and a significant portion of the $1,400 stimulus checks will filter their way into the real economy.
One of the major arguments with the Federal Reserve’s QE program is that it does not reach the real economy. Potentially, the direct stimulus checks will boost the real US economy, and drive demand for the greenback.
On the bear side, the case of unprecedented fiscal spending is causing concerns about the United States debt to GDP ratio, and the fact that the purchasing power of the US dollar will be significantly weakened.
This is something that will probably come home to roost one-day, however, timing the expected decline and major market shift towards the US dollar currency will not be easy. The Bear case is strong and undeniable on this front and is certainly something that propelled the price of Bitcoin higher, and gold to a lesser degree over recent months.
Should we see the Biden administration announce an expected $3 trillion infrastructure and green spending bill, it may cause financial markets to have serious concerns about this unprecedented and unchecked spending from the US government. Overall, the bulls case is probably winning on the fundamental front right now.
Sentiment
Traders are becoming extremely bullish towards the US dollar index now. The ActivTrader market sentiment tool shows that some 78 percent of traders are bullish towards the buck at this moment.
While traders are currently on the right side of the trade, it should be noted that one-way sentiment skews rarely end well. Historical data clearly shows that the crowd has poor market timing, and often late in the game when moving in on market trends.
With this in mind, it could mean the US dollar is set to correct lower. It very much depends on the sentiment skew now. If the bullish sentiment towards the US dollar index starts to increase it would be a major red flag for me.
Overall, the bear case is strong on the sentiment front now and watch out for a sudden reversal if sentiment remains around current levels or increases.
Technicals
In terms of technicals a major shift has taken place over recent days. The bulls case looks solid for the greenback while bulls anchor price above the index’s trend defining 200-day moving average, around the 92.50 region.
The fact that bulls are holding the daily candle above this area is a very good indication that further gains towards the 93.50 to 94.00 area seem likely over the medium-term horizon. Once again, on a medium-term basis, this really is a defining moment for the US dollar index.
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Something else to note is the bearish breakdown in the EURUSD pair. The euro currency makes up a significant portion of the US dollar index, thus it must be watched closely. The EURUSD pair has recently broken under its 200-day, and look set for further losses.
Overall, the bulls are winning on the technical front, and stand to gain the most while the US dollar index is holding above its 200-day MA. The only major near-term cause for concern is the overly bullish sentiment towards the US dollar index.
