Technical Bias: Bearish
“¢ Dollar Index – Possible Head and Shoulders pattern forming.
“¢ If the pattern turns out to be correct, then the dollar index could move lower.
“¢ Fed’s Yellen speech later today could act as a catalyst for the dollar index.
The US dollar index is forming a bearish pattern, which has a potential for sharp reversal moving ahead, as the pairs like EURUSD, NZDUSD and AUDUSD are close to a major support area.
The dollar index after setting a low at 78.94 climbed sharply to set a short-term high at 80.43. It has moved lower since then, but managed to find support around an important confluence zone of the 38.2% Fibonacci retracement level of the last leg higher from the 78.94 low to 80.43 high and a previous swing area at 79.90. However, there is a possible head and shoulders pattern forming on the 4 hour timeframe for the dollar index. If the dollar index breaks the 79.90-85 support area, then it might fall towards the next support level at 79.60. Any further losses could take the dollar index towards the 79.45 level.
The mentioned head and shoulders pattern would invalidate if the dollar index jumps above the 80.20 level. In that situation, it might again challenge the previous high of 80.44 and could possibly break it to set a new high in the short term. RSI is back above the 50 level on the 4 hour timeframe, which is a positive sign, but the break is not a convincing one. So, any major news event or economic release could trigger a swing move in the dollar.
The Fed chairwoman Janet Yellen will be speaking later during the New York session, which could act as a catalyst for the dollar moving ahead. Any dovish remarks would weigh on the dollar. Moreover, the FOMC meeting minutes will also be released few hours later, which could add to the volatility in the short term.