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Is the greenback due a pullback?

The last five months have not been good ones for the US dollar index, and the general consensus is that we could well have further to fall.

The last time the US dollar index fell for five months in a row was back in 2011, and you have go back to 2003 to find the last time we saw six successive monthly declines, which would on the law of probability suggest the scope for a rebound.

While the view that we have further fall may well be true in the longer term, consensus views have a tendency to become a little crowded and judging by the rebound we saw on Friday the US dollar bearish trade is starting to become a little overextended.

From a technical point of view it always pays to have a somewhat detached view from the overarching narrative that tends to prompt traders and investors to coalesce around a common position, and we’ve gone from an overwhelming bullish to bearish narrative in quite a short space of time.

This is where charts can come in useful and looking at the past can usually offer insights into future behaviour.

The rise in the euro against the US dollar is a case in point having risen from lows of 1.1180 in June to trade just above 1.1900 last week, a rise of nearly 8%.

Last week we saw the EURUSD break above its 200 week MA for the first time since 2014 but crucially we weren’t able to close above this level, which rather begs the question as to why we were unable to.

To look at why we may struggle to push up to the 1.2000 level in the short term, we need to look at the US dollar index and the price action here is instructive. Technical analysis and charts work on the basis of confirmation and this is an area that can be overlooked.

The US dollar index is extremely important where movements in the US dollar is concerned due its heavy euro weighting of nearly 58%.

In this context any trader needs to be mindful of what the US dollar index is doing, and it is here we are seeing warning signs of important US dollar support levels.

Not only are we above the 200 week MA but we also held above the lows of last year.

If we are to see further US dollar declines and euro strength we need to see a sustained move below these two key levels and while these two levels of support remain intact, it will be very difficult for the EURUSD to rally meaningfully through last week’s highs without these levels giving way as well.

In summary while further US dollar losses remain the consensus view of most traders and investors we would need to see a break below these key support levels as well as the worst run of monthly declines since 2003.

For that to happen we would need to see a further deterioration in US inflation prospects, something we may get further insight on later this week with US CPI, as well as a much sharper improvement in European economic prospects than we’ve seen already so far this year.

We also have to ask how much of this may already be priced in.

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