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CFDs are complex instruments. 72% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

USD price reversal forming from overbought territory

The recent rally in the US dollar index has occurred within a longer term downtrend, with the price now trading in overbought territory.

Source: Bloomberg

US dollar index / basket – technical analysis

Source: IG

The 20 day simple moving average (20MA) (red line) trading above the 50 day simple moving average (50MA) (green line) shows that the dollar index price is trending higher in the short to medium term. The price does however remain firmly below the 200 day simple moving average (200MA) (blue line), suggesting that the longer term trend remains down (for the time being). The stochastic suggests that the price has now moved into overbought territory.

On balance these technical indications suggest that the dollar is currently in a short to medium term correction of the longer term downtrend still in place. The overbought signal suggests that the short to medium term correction could be nearing an end.

US dollar index / basket – price action

Source: IG

The short to medium term correction of the longer term downtrend has taken the price to a confluence of both trend line and horizontal resistance at 105.30. The price looks to be forming a bearish price reversal (circled blue) off this confluence of resistance as well as from overbought territory.

For confirmation thereof (bearish reversal), we would like to see today’s candle producing a close below the preceding long bodied green candles halfway mark. In this scenario, 103.70 becomes the initial support target from the move while a close above the 105.30 level might be used as a stop loss indication for the trade. Should the dollar price manage to close below the 103.70 support level, 102.30 becomes the next support target considered.

Should the dollar price instead move to close above the 105.30 level, and not confirm the bearish reversal suggested above, the short bias to trades on the index would need to be reassessed.

US dollar index / basket – IG client sentiment

Source: IG

The above graphic highlights current IG client sentiment data for the US dollar basket / index as of the 27th of February 2023. 76% of IG clients with open positions on the index currently expect the price to rise in the near term, while 24% of IG clients with open positions on the index expect it to fall.

The IG sentiment indicator does reflect predominantly retail trade sentiment on the US dollar index right now.

Key data to watch this week

Key economic data scheduled for the week which is likely to influence the US dollar is as follows:

  • 1 March, ISM Manufacturing Purchasing Managers Index (PMI) data out of the US (est. 47.9 previous 47.4)
  • 2 March, Weekly Unemployment Claims data out of the US (est. 196000, previous 192000)
  • 2 March, Federal Open Market Committee (FOMC) member Waller speaks
  • 3 March, ISM Services PMI data out of the US (est. 54.4, previous 55.2)

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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