The US dollar index is dropping hard on the foreign exchange market as the greenback fails to recover, despite last Friday’s extremely strong PMI services and manufacturing headline numbers from the United States economy.
Traders and investors are failing to believe that the Federal Reserve are moving closing to talking about tapering QE, as some FED members alluded to last week. The positive April PMI numbers from the US failed to offset the disappointing Non-farm payrolls job report last month.
On the technical front, the US dollar index is very bearish. The US dollar index sits on the cusp of a technical meltdown as the price is starting to breakdown under the neckline of a massive head and shoulders pattern.
Bears have eroded last week’s gains at start of this week as the index slips under the 90.00 level, bulls are facing the mammoth task of needing to the rally the US dollar index by almost 400 points to invalidate the mentioned bearish price pattern.
Looking at market sentiment, the ActivTrader Market Sentiment tool shows that some 82 percent of traders are bullish towards the US dollar index. This one-way sentiment skew is issuing a warning that traders are way too bullish.
Retail traders are on the right side of the trend in increasingly worrying numbers. I tend to believe that another major leg lower is starting to commence if we factor in the huge bullish bias right now. Majors like the EURUSD and the GBPUSD pair could be on the way to a new 2021 trading high.
US Dollar Index Short-Term Technical Analysis
According to the four-hour time frame a bearish head and shoulders pattern has been activated and is offering a warning sign that a 100-point drop is coming, after the 90.00 support level was broken.
Bulls need to move the price above the 90.80 level to invalidate the bearish price pattern across the lower time frame. If the pattern is invalidated then a counter-rally towards the 92.00 level should be expected.
If we consider the overall bearish trend both in the short and medium-term, then it is more likely than not that the US dollar index will eventually break the 89.00 level.
US Dollar Index Medium-Term Technical Analysis
Looking at the daily time chart a massive complex head and shoulders pattern appears to be forming, with the US dollar index appearing to be close to a major technical meltdown towards the 86.50 price area.
Watch out for the index to go into freefall if the price holds under the 89.80 level on a sustained basis this week. Selling counter rallies may be the best option this week, as the mentioned bearish pattern is probably going to play out.