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The US Dollar Index is gaining strength in early-week trade, as sell-off in Chinese equity markets and optimism towards the US economy help boost the prospects of the greenback ahead of this week’s FOMC policy decision.
So far this week the US dollar currency has made solid gains against the Japanese yen, British pound, Antipodean, and of course the euro currency. Negative sentiment the single currency on Monday provided a strong boost for the US dollar index.
US dollar traders are almost certainly focused on two major market events this week. The release of US retail sales and the FOMC policy decision will give a key insight into the health of the United States consumer, while the FOMC meeting will reveal how the Federal Reserve policy makers currently feel about the US economy.
Both events have the ability to affect the US dollar index, and the FOMC policy meeting even has the ability to set the market tone for the rest of the month. The technicals currently show that the US dollar index is trading at a critical juncture.
A number of key technical indicators are flashing big buy signals on the higher time frames. For example, the Parabolic SAR indicator is currently issuing its first buy signal on the weekly time frame in nearly one year.
It should be noted that the US dollar index is still technically bearish, after buyers failed to take advantage of the early-month breakout and move the price above the index’s 200-day moving average, close to the 92.70 level.
It is essential that bulls reclaim the index’s 200-day moving average to sustain the recovery and to further underpin the bid-tone in the index. Traders should note that the US dollar index has not traded above its 200-day moving average since May 2020.
Looking at how traders are currently positioned, the ActivTrader platform Market Sentiment tool shows that traders are becoming overly bullish towards the US dollar index right now. Some 78 percent of traders are expecting more gains in the US dollar index despite the fact that the index is still technically bearish and suffered a heavy down week last week.
Should we see the US dollar index turning lower, and sentiment holding at current levels, this would provide a major red flag that the greenback may need to head lower until sentiment starts to neutralize again.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame a bullish inverted head and shoulders pattern has reached its full upside target, and the index has basically been in correction mode since the upside objective of the pattern was reached.
In terms of current technicals on the mentioned time frame, the Parabolic SAR is generating a buy signal while the price trades above the 91.30 level, while the short-term trend remains bullish while the index holds above the 91.00 level.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame the Parabolic SAR indicator is issuing a buy signal while the price trades above the 91.60 level. Very importantly, the Parabolic Indicator is generating a buy signal while the price trades above the 91.20 level.
Traders should note that the overall trend, defined by the 200-day moving average, will turn bullish if the 92.70 level is broken. Gains towards the 93.50, and possibly the 94.00 level could occur if the 200-day moving average is broken.
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