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The US dollar index started to falter on the foreign exchange market last week after appearing to be in bullish breakout mode above the 93.70 level for most of the month of October.
A lack of buying interest above the 94.00 level sealed the greenbacks fate, and eventually caused the US dollar index to falter under the 93.50 support level, marking a near 120-point decline from the highs of the month.
Still, despite the bearish weekly performance and negative weekly close, the fundamental backdrop is stopping the US dollar index from falling too far away from the 93.70 area.
FED Chair Jerome gave a notably bullish speech towards tapering in Q1 on Friday, however, his comments on inflation and future rate increases spooked financial markets into risk-off mode.
Powell said “No one should doubt that we will use these tools to guide inflation back down to 2% over time. At the same time, we think we can be patient and allow the recovery to take place and allow the labor market to heal.”
Some warning signs are certainly presented on the price chart while the US dollar index trades below the 93.70 level, and we could certainly see another bout of US dollar weakness this week.
We should also consider the EURUSD. The single currency makes up a substantial basket of the US dollar index, and the euro has yet to attract buying interest. EURUSD interest could well and truly sink the buck.
The ActivTrader market sentiment tool is showing that some 54 percent of traders are bearish towards the US dollar index. This is a minor drop since last week and speaks to the fact that an overall neutral bias is still in place.
Ideally, we need to see a big sentiment bias forming for a major break to ensue. Traders turning wholesale bullish would be a great sign that a bearish correction or reversal is coming.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, the technical are strictly bearish, with the US dollar trading under cloud support and battling back towards the 93.70 technical zone.
The Ichimoku indicator shows that the final line of four-hour support is Kijun sen line, around the 93.50 level, a break under this region would be seal the fate of the US dollar this week.
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US Dollar Index Medium-term Technical Analysis
The medium-term picture for the US dollar index is still fairly uncertain, as the buck has yet to break below the Tenkan line or indeed the Kijun sen line, let alone cloud support.
The Ichimoku indicator shows the sustained weakness under the Tenkan and Kijun sen lines and we should see a major test of cloud support coming, around the 92.90 level.
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