The US dollar index has started to accelerate to the downside due to the weaker PMI services number from the US economy and the notion that the Fed may be about to step back from hiking aggressively due to the weakening economic picture.
In this type of environment traders are looking to other central banks to play catch up. If this is the case, then we could well see the global central banks ramping up hikes in a similar magnitude to the Federal Reserve.
Traders could also be cautious about this trade as the ECB is expected to hike rates by 75 basis points today. Due to the size of the euro in the trade weighting of the DXY, if the EURUSD pair starts to crash then expect the DXY to dramatically accelerate higher.
We should also consider the technical are calling for an extended pullback, due the presence of a bearish triple top pattern. The risk is a sudden drop back towards the DXY’s 200-day moving average.
For now, in order for the uptrend in the US dollar index to really stick technically, we probably need to see the 109.00 area defended. This is former breakout resistance now turned support.
According to the ActivTrader Market Sentiment tool some 60% of traders are bullish towards the US dollar index, which certainly hints that bulls could be in for more pain this week.
Overall, with retail traders still positive we are probably going to see the US dollar index heading lower. Although the pace of this week’s decline is pretty significant already.
US dollar index Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that a bearish triple top pattern is starting to play out. The pattern has not yet met its upwards price target.
The mentioned time frame is also showing a clear break under the US dollar index’s 200-period moving average. This is a very negative technical sign. The short-term trend is now bearish.
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US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar has ignited a huge bullish reversal pattern, however, we could soon see a retest of this former key breakout area.
I expect more downside towards the breakout zone if the 109.00 level is broken. If this remains defended then expect an explosive move back towards the 114.00 level.
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