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The US Dollar Index is coming under pressure ahead of the Non-farm payrolls jobs report as US stocks move higher while US Treasury yields start to fall, meaning that financial markets are expecting higher growth in a low-rate environment.
Another dilemma for US dollar traders is the fact that the Biden administration is planning to rise corporate taxes to pay for the $2.3 trillion infrastructure spending bill. This is causing some caution towards the US corporate environment.
Since Wednesday, this week the US dollar index has been in bearish correction mode after moving towards the 93.40 level, and hitting levels not seen November 2020. On the positive front, the index is still above its 200-day moving average.
Last week the US dollar index broke above its 200-day moving average for the first-time since June 2020. As the pullback in the US dollar index continues, traders will be keeping their eye on this key technical metric, which is found around the 92.45 level.
Worrying for bulls, the MACD indicator on the lower time frames is currently showing a substantial amount of negative price divergence which may need to reverse before the new bullish trend in the US index can continue. It is highly likely that the Non-farm payrolls job report will set the tone for US dollar index this month.
Looking at how traders are currently positioned, the ActivTrader platform Market Sentiment tool shows that traders are becoming more bullish towards the US dollar index. This plays into the near-term negative view.
Some 61 percent of traders are expecting more gains in the US dollar index. The sentiment skew is not too one-sided; however, historical data has shown that retail traders are typically on the wrong side of the market. I would expect more losses until sentiment turns bearish, or indeed starts to neutralize.
US Dollar Index short-term Technical Analysis
Looking at the one-hour time frame a head and shoulders pattern has been activated, following the recent move below the 93.00 level. The 92.60 level is seen as the overall target of the bearish pattern.
Traders should also note that bearish MACD price divergence has also formed during the recent advance to the 93.60 level. According to the one-hour time frame the divergence extends down towards the 92.30 level.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame, bulls need to advance the US dollar index towards the 94.40 area to form a large bullish reverse pattern, which should secure the medium-term prospects of the US dollar.
Failure to do this and a notably bearish double-top pattern will form, which would place the emphasis on more medium-term downside. Traders will also need to hold price above the 92.45 level to keep the new bullish trend, and recent recovery on track.
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