US Dollar Index technical set up points to a mid-term decline

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The U.S. dollar has been enjoying a strong trend since forming a bottom below 90.60 from January through April this year. The breakout above the 90.60 level of resistance pushed the greenback on a solid momentum led rally.

As the U.S. dollar index posted a reversal near the 95.05 level last week, this marked a brief retest of the resistance level.

Based on the rising median line and the falling price channel set up alongside the Stochastics posting a lower high, the greenback is expected to give back some of the gains for a much needed technical correction.

The breakout from the resistance level near 90.87 – 90.60 opens the way for a much needed retest of support, which previously served as resistance. The decline to this level is likely to occur over the period of the next three months or the third quarter of this year.

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U.S. dollar index technical set up
U.S. dollar index technical set up

With the markets currently bullish on the U.S. economy and the Federal Reserve recently committing itself to an additional rate hike for the rest of the year, sentiment is high when it comes to the U.S. dollar.

However, despite the bullish outlines, the fact remains that investors are nervous about the outcome of the trade policies being pursued by the current U.S. administration.

The fact that at any point Trump’s rhetoric could reach a tipping point could see the markets post a strong correction. Central bankers across most of the G7 economies are hopeful that the current conditions will continue to assist policymakers on a tightening path. But, a lot of it will depend on how the trade wars unfold.

So far, some of the major U.S. trading partners and its allies have managed to keep the tensions in check, but it is only a matter of time before which one of the trading partners will snap.

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Imposing trade restrictions, especially on China and the Eurozone could have detrimental effects.

Aligning this view to the technical chart set up shows that the U.S. dollar could be in for some short term correction that could keep the currently hawkish sentiment in check.

A decline to 90.87 might seem like the fundamentals are pointing to some surprise that is yet to be discounted by the markets. However, if one takes a look at the bigger picture, the fact remains that the U.S. dollar index is in the process of chalking out a major inverse head and shoulders pattern.

The recent test near the resistance zone of 95.05 – 94.18 and the anticipated decline to 90.87 – 90.60 level of support, shows an evolving inverse head and shoulders pattern taking shape.

U.S. Dollar Index – Technical Set up: Inverse head and shoulders pattern
U.S. Dollar Index – Technical Set up: Inverse head and shoulders pattern

A rebound off the 90.87 – 90.60 level of support could signal a potential breach of the neckline resistance which could eventually see the USDX post a rally to reclaim the 99.00 – 100.00 elusive yet psychological level.

This should offer speculators some good trading opportunities especially the EURUSD and the USDCHF which tend to have a strong correlation to the U.S. dollar index.

While technical analysis can be a good way to predict the medium term price action, the fundamentals quite often tend to have a more different outcome than expected. For now, speculators are better off taking cues from the USDX rather than focusing on the currency pairs in isolation.

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The upcoming volatility as suggested by the technical set ups should be more than enough to create some really good trading opportunities.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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