US Dollar Index: weekly reversal signal in the making

• After the miss on US core inflation and Non-Farm Payroll, USD bulls are starting to take profits.
• The bull momentum in the greenback is strong but the bears managed to print a weekly reversal bar. 

The US Dollar Index (DXY), which measures the greenback relative to a basket of currencies, is trading at around 92.50 and is in its third day of decline after a strong multi-week move up. 

In the European session DXY got a small lift, up to 92.84 and then the bears drove the market down to 92.37 in the American session. The greenback is now consolidating in the 92.50 region. 

DXY has been trading higher strongly since mid-March. It has gained a little more than 5% and traded from 88.94 to 93.42 which was reached this Wednesday. The massive move higher in the buck was fueled by market’s expectations of three to four rate hikes by the Federal Reserve Bank in 2018. 

However, Non-Farm Payroll last Friday came below expectations at 164K versus 192K while the Average Hourly Earnings (wage’s growth) also came below forecast at 0.1% vs. 0.2% expected but USD bulls shrugged off the bad news. However, this week on Thursday, the US core inflation, Consumer Price Index (CPI) indicator came below expectations at 2.1% versus 2.2% and USD bulls started to get rid of their long USD positions as a fourth rate hike might off the table.

Technically, DXY is about to end the week with a rather strong technical reversal pattern on the weekly time-frame. Even if it is too early to call a strong sell-off, it is possible that DXY continues the corrective move next week.

On the macroeconomic front, next week on Tuesday will see the Eurozone Gross Domestic Product, which can impact DXY as the euro weighs for more than 57% in the index. On the same day, US Retail Sales can be a market mover as well. Wednesday will see the German and Eurozone inflation figures and as those are tier-one macroeconomic data (especially the Eurozone CPI) the market will likely move a great deal. 

DXY weekly chart 

DXY is in a bear channel and this week it tested the 50-period simple moving average (SMA) on the weekly chart but has been unable to break above it. DXY is still trading below its three main SMA, the 50, 100 and 200-period, signaling that the momentum is still potentially to the downside. However, the Relative Strength Indicator (RSI) and Moving Average Convergence Divergence (MACD) are pointing to more gains. Indeed, the breakout of the last four weeks has been strong. However, the weekly chart printed a shooting star which is a potential reversal candle. Although a retracement back to 90.00 seems far-fetched at this point, a correction below the 92.00 mark is possible. The 91.01 level, previous swing low in September, might be another potential support level. If the bulls continue their advanced resistance is seen at 93.42 high of the week and then at 94.22, which is a prior swing high and the 38.2% Fibonacci retracement from the 2016-2018 bear trend. With this week’s bearish reversal signal, bulls next week will need to trade above this week’s high to discourage the bears.