The US dollar index has started to rise again due to fears about Deutsche bank causing a flight into the US dollar as the German bank is of course a non-US bank, meaning eurozone contagion is likely.
Sure, an implosion of a major eurozone bank would hit US banks if they are exposed, however, the rationale is that the balance sheets of most European banks would be more exposed here.
With that said, the order of the day is likely to be more EURUSD and GBPUSD weakness as we head into the early week. However, any positive decisions to help the bank could hurt the buck.
Moreover, the US dollar index does look primed for more weakness as the Fed could well have implemented its last rate hike in some time judging by the mix commentary from some Fed members.
Technically, the US dollar has got the greenlight to really rally now as support is breaking on the GBPUSD and EURUSD pairs if we see a break under the February lows for the US dollar index.
Simply put, this means that we must be very careful with how the US dollar index trades this week. A reversal of the risk trades in EURUSD and GBPUSD to the upside could cause the buck to implode technically.
This is also confirmed by sentiment analysis, as it shows a huge majority of traders are very long the US dollar index, which likely means the need to be cautious right now.
According to the ActivTrader Market Sentiment tool some 87% 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 has formed a huge head and shoulders pattern would could be pointing to a break under the 102.00 level.
I would be inclined to look for a move under the 100.00 level in the US dollar if the pattern breaks. The 99.00 level looks to be an appropriate target.
US dollar index Medium-Term Technical Analysis
The daily time frame is showing that US dollar has broken under its 50-day moving average, so far a death-cross is still underway, but not yet is it in full swing as the moving averages move sideways.
For now, a double bottom pattern is in play. This means this weak a big reversal or a major fallout is coming. Interesting time ahead.
