USD on track to snap 4-month winning streak, EUR/USD bulls eye 1.09

The US dollar index is currently down -1.7% in May, which has effectively seen it wipe off April’s gains and snap a 4-month rally. The last time the dollar rose for four months was just ahead of the 2022 high, and if history were to repeat it points to another couple of months of the dollar’s decline and for bearish momentum to accelerate.

As things stand, the USD index is close to confirming a dark-cloud cover on the monthly chart, which itself is a higher low relative to the 2023 high. And should the Fed throw in the towel and begin signalling a rate cut, we could be looking at a quick break below 104. I’m just not convinced we’re there yet.

Besides, the daily chart shows the USD index is close to retest the December trendline and Q3 open price. And traders clearly want to test it, given it now trades lower for a third consecutive day. Although  trading volumes remain very thin, but are expected to pickup with the return of European and US trade desks after the long weekend.

Also note that the highest daily volume coincided with the 2-bar reversal on May 2^nd, and volume shave been trending lower since. This is not what I’d expect to see on a convincing bearish trend, so I remain on guard for another leg higher. Over the near-term, I am equally open to  some messy price action around the trendine or 104 handle as much as I am to a simply rally from current levels. I just do not think the dollar is ready to completely roll over yet.

EUR/USD technical analysis:

The euro is trying to carve out a third bullish day, and the MTD high and 1.09 handle are within a couple of days’ trade. Assuming we see the inevitable attack on the USD index trendline and lunge for the 104 handle, then EUR/USD could well reach 1.09. But as mentioned above, I remain unconvinced by these moves – even if they show the potential to extend.

The 1-hour chart shows a relatively straight move towards the weekly S1 pivot and 1.0885 high, and it would almost be rude not to test it. But note the declining volumes on this timeframe, then I cannot help but suspect EUR/USD will try to carve out a top soon.

Bears could seek to fade into rallies up to resistance levels. Should bearish momentum return, a move bac to 1.0850 seems feasible, which is just above the weekly point and high-volume node.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge