The US dollar index has started to consolidate ahead of the Fed meeting on Wednesday, following the long holiday weekend and the release of the ISM Manufacturing survey.
The Federal Reserve officials appear on track to extend their run of interest-rate hikes when they meet this week, shrugging off fears about the recent banking concerns. Traders are also on watch that this could be the last hike in the cycle, making this week’s meeting extremely important.
On Monday data showed that the ISM Manufacturing PMI in the United States rose to 47.1 in April 2023, up from a three-year low of 46.3 in the previous month and slightly above market consensus of 46.8.
Still, the latest reading suggested economic activity in the manufacturing sector shrank for a sixth consecutive month, as higher borrowing costs and tight credit hit activity and boosted the risk of a recession this year.
The contraction rates softened for both output (48.9 vs 47.8 in March) and new orders (45.7 vs 44.3), while employment levels stabilized after two periods of decline. On the price front, input costs rebounded in April after decreasing slightly the month before
Going forward, the fear is that the US dollar index could slip well below the 100.00 level and begin to drop if the Fed end the rate cycle. A more hawkish Fed could cause the buck to surge to at least 103.00.
Sentiment analysis shows a big change. Bullish sentiment has dropped significantly, however, a minor worry is afoot as sentiment still shows majority of traders are very long the US dollar index, which likely means the need to be cautious right now. This could spell more minor losses for the buck.
According to the ActivTrader Market Sentiment tool some 58% of traders are bullish towards the US dollar index, which certainly hints that bulls could be in for some 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 the US dollar index is not forming bearish lower low, all classic signs that the buck could head higher if 101.00 remains defended..
I would be inclined to look for a short-term move towards the 100.00 area and complete breakdown if the April low I breach. A move above 102.00 should be very bullish.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that a bearish head and shoulders pattern is also still seen with the pattern potential carving out a final right hand around currency levels or right area.
Either way, the US dollar looks primed for a major move in the medium-term. If the next major downleg under 101.00 happens we could see a major acceleration towards 98.00 and 96.00.
A break above the 103.00 resistance level should be considered very bullish over the medium-term.
