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The US dollar index is close to eroding all of its hard-fought August gains as this week’s soft ADP jobs report increases fears that today’s Non-farm Payrolls job report is going to miss expectations.
Traders should be aware that a large bout of volatility could be coming for the US dollar index as market participants are probably going to react in a big way to the August monthly job report.
Should we see a much weaker-than-expected number the market could go into a meltdown, with the stock markets selling off sharply and traders moving into the safety of the US dollar.
This of course could be just a knee-jerk reaction, as the bigger picture will see the FED keeping the foot on the printing press, which should ultimately be bullish for stock and the bearish for the US dollar.
Technical warning signs are starting to emerge during this recent drop in the US dollar index towards the 92.00 level. Bullish MACD divergence now extends above the 93.00 level offering a warning that a US dollar revival could come today.
It should be noted that sentiment is currently hugely one-sided and offering a big red flag to US dollar bears. The ActivTrader market sentiment tool is showing that some 86 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 any time because retail traders are becoming too bearish. This is warning for a possible US dollar short squeeze today.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, large head and shoulders pattern has officially formed and has been activated to the downside. We should consider today that if the down move continues we could see a further drop towards the 88.00 level.
However, if we see the US dollar gaining strength please be aware that bullish MACD price divergence is present up towards the 93.20 price area.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame a much larger head shoulders pattern could be forming in the background, with the US dollar index having to drop towards the 89.00 area to form this pattern.
A more likely scenario is that a bearish double-top may need to form before we see the big drop in the US dollar index towards the 89.00 level that I am expecting.
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.
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