The US dollar index started to recover last week, following the recent bout of heavy greenback selling in the aftermath of the Jackson Hole Economic symposium and the soft August jobs report.
This week the US dollar is back under scrutiny, due to the fact that the United States release three big economic data points. The US CPI number for August, Retail sales, and the Michigan Consumer Sentiment number.
All three metrics turned lower last month, with downturn in retail sales and sentiment raising eyebrows about the strength of the United States economy. Another strong CPI number will all leave the FED isolated in regard to tapering QE.
All in all, it should be a big week for the greenback, and upside momentum is starting to gather due to increased risk-off market sentiment, and nervousness that stock could correct heavily at anytime and traders could move back into the safety of the greenback.
I suspect we may see traders testing back towards the August high for the US dollar index. The reason could be that technical traders need to confirm a meaningful high has formed after the US dollar hit a new 2021 high last month.
It should be noted that traders sentiment data is offering a big red flag to US dollar bears. The ActivTrader market sentiment tool is showing that some 69 percent of traders are bearish towards the US dollar index.
Typically, one-way bearish sentiments skews are warning us that this ongoing trade could reverse at anyime. I think the current sentiment metric could mean that the US dollar index may have more short-term strength.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, inverted large head and shoulders pattern has formed and appears to be in the process of forming a final right-hand shoulder to complete the pattern.
Gains above the 92.80 resistance level are currently required to activate the typically bullish price pattern, which holds upside potential of some 80 points. I think that a test back towards the 93.50 area makes sense this week.
US Dollar Index Medium-term Technical Analysis
According to the daily time frame a large head shoulders pattern could be forming in the background, and the pattern is just going through the formalities before the next big drop..
I also want to repeat that the notion that the marker may need to confirm that the August high is in fact the final medium-term high appears a sound one, and a final right-hand shoulder may need to form this.