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The US Dollar Index is poised for a major directional move on the foreign exchange market over the days and weeks ahead, as a number of major currency pair’s look set to breakout against the greenback after weeks of back-and-forth trading action.
According to technical analysis, the US Dollar Index has been in a bearish market trend since late-May last year. A bearish trend is defined by an asset class trading below its key 200-day moving average.
In terms of fundamentals, the US Dollar Index has been sold by traders due to the fact that the Federal Reserve have dramatically increase their balance sheet since COVID-19 as they began implementing QE4.
Other factors that have weighed on the greenback during its downtrend has been the massive COVID-19 stimulus packages from the US government, and major bouts of uncertainty towards US politics.
The US Dollar Index has started to stabilize after months of losses, and now looks set to stage a potential comeback. The only concerning for traders with the US Dollar Index long trade is the prospect of the massive $1.9 trillion stimulus package that the US Democrat party may soon unleash on the US economy.
According to most analysts, the bullish case for the greenback at present comes from the prospect of improving US economy, rising inflation, and safe-haven inflows from COVID-19 concerns and also Wall Street’s fears over stocks declining.
During the financial crisis of 2008 the US Dollar Index surged as traders sold stocks and flocked into the buck. With the ongoing fears about Main Street versus Wall Street, stock certainly also has the ability to move market lower. This could benefit the US Dollar Index.
According to the ActivTrader Market Sentiment tool traders are bullish towards the US Dollar Index. Retail traders typically exit emerging trends too earlier or lean against prevailing market trends. This does not mean that these traders are always on the wrong side, but we should remind ourselves that the overall trend is still to the downside, and the US Dollar Index could squeeze somewhat lower before staging a bullish breakout.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame a massive reversal could take place if buyers move the price above the 91.30 level. The reason being is that a large, inverted head and shoulder pattern with a 200-point upside projection will be activated.
The four-hour time frame also shows a notable head and shoulder pattern, which should be a concern for bulls. To invalidate the bearish price pattern, buyers need to move the price above the 91.00 resistance level.
Source by ActivTrader.
If sellers activate the bearish price pattern then the US Dollar Index could fall towards the multi-year lows around the 89.00 support level. The triggered area or neckline of the bearish pattern is found around the 90.00 level. Overall, expect a major battle between the 91.00 to 90.00 area this week.
US Dollar Index Medium-term Technical Analysis
According to the daily time frame, a major bullish breakout will take place above a falling wedge pattern if the price moves above the 91.30 level this week. Due to the extended period that the US Dollar Index has spent inside the falling wedge a huge upside move should take place if the breakout comes to fruition.
Source by ActivTrader.
It is also noteworthy that lower time frame analysis is also flagging the 91.30 level as an area of extreme importance. Overall, failure to breakout above the top of the falling wedge could result in a major US dollar sell-off towards the bottom of the wedge, around the 89.00 level.
