The US dollar index started to surge on the weekly open, but as the month of March gets underway a risk-on tone is starting to see the US dollar slightly under pressure against the majors.
Most FX traders are cautious at the moment due to Ukraine crisis, so it is very unlikely that we will see a big down move in the world’s reserve currency until Ukraine crisis is resolved.
However, this does not mean that we will not see a minor corrective move in the buck until the FED policy meeting. We should also consider that the ECB meeting next week could rock the US dollar index.
It is likely that the US dollar index will strengthen after the next FED meeting, as the US central bank hikes interest rates. But risks remain going into the meeting as the ECB and positive news could cause a short-term down move.
The ActivTrader market sentiment tool is showing that some 68 percent of traders are bullish towards the US dollar index, after last week’s big upmove in the greenback due to Ukraine invasion.
The bullish skew is bad news for longs, as typically such overstretched sentiment from the retail crowd usually hints that the short squeeze on retail traders is going to continue. Traders do need to be careful ahead of next week’s ECB meeting.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, the technicals look like the US dollar index is running awfully close to invalidating a large head and shoulders pattern.
According to technical analysis, a sustained breach of the 97.40 level would invalidate the bearish pattern. As stated previously, the only relief for bulls is that the US dollar index could have some bearish short-term correction due to the ECB.
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US Dollar Index Medium-term Technical Analysis
The medium-term picture for the US dollar index is only bullish if buyers can somehow move the price above the upper Bollinger Band, around the 97.00 price zone.
This is the area I am watching for the next powerful upside breakdown or reversal in the US dollar index. It was also a key battleground for bulls and bears trading the US dollar index this month.
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