The US dollar index has started the week in a positive fashion due to the debt ceiling deal being reach and positivity towards the greenback and several fundamental factors influenced the movements in currency market.
Traders are piling into the greenback as the euro faced downward pressure due to Germany being confirmed to be in a recession and the US dollar benefited from safe-haven demand as concerns.
The US currency is also supported by reduced expectations for Federal Reserve rate cuts. Traders revised their predictions, now anticipating only a quarter-point rate cut in December, down from previous estimates of up to 75 basis points.
Going forward, bulls are betting that the US dollar index could rally towards the 106.00, meaning its 200-day moving average, as it undergoes a major trend test after its recent slide towards 101.00.
Sentiment analysis is also giving out bullish signs as the majority of traders are short the US dollar index, which likely means the need to be cautious right now on the sell side. This could spell more gains for the buck.
According to the ActivTrader Market Sentiment tool some 14% of traders are bullish towards the US dollar index, which provides a hint that the greenback can still head higher.
Overall, with retail traders stacked short we are probably going to see the US dollar index heading higher still. Although the pace of this week’s gains also depends on the trading action around 104.00.
US dollar index Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the US dollar index is forming bullish higher highs and lower lows, all are classic signs that the buck could continue to trade higher.
It is also notable that significant amounts of bearish Momentum divergence have built as the US dollar index heads higher, and the Momentum indicator starts to trade in the opposite direction.
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, or a move above 105.50 could cause an invalidation of the bearish price pattern.
