US Dollar Index (DX) Futures Technical Analysis – Ripe for Short-Covering Rally Ahead of Next Week’s Fed Meeting

September U.S. Dollar Index futures plunged to their lowest level since early September 2016 on Friday. The move was fueled by a rally in the Euro which took the single-currency to its highest level against the U.S. Dollar in nearly two-years.

The dollar was crushed by the Euro after European Central Bank President Mario Draghi said policymakers would discuss possible changes to its bond-buying scheme starting in September.

Additionally, the dollar continue to be pressured by the collapse in the Republican plan to overhaul the U.S. healthcare system. Weak economic data has also lowered expectations for another interest rate increase from the Federal Reserve later this year, making the U.S. Dollar a less-attractive investment.

Despite the strong downtrend, the dollar index remains vulnerable to a counter-trend rally because the ECB is likely to try to downplay its actions in an attempt to weaken the Euro and prevent volatility in the financial markets.

Also, the Fed is set to make another interest rate decision next week and issue its latest monetary policy statement. If policymakers continue to remain hawkish, the dollar could be underpinned. The news may also give short-sellers an excuse to lighten up on the downside, fueling a short-covering rally.

The September futures contract is walking down the same stairs it walked up, turning old bottoms into new tops.

Based on Thursday’s close at 94.06 and the earlier price action, the direction of the index is being controlled by a steep downtrending angle from the 95.960 top, moving down at a rate of .25 per day since July 11. It is at 94.21.

Look for the downtrend to continue as long as the index stays under this angle. Potential downside targets are 93.97 and 93.58. The latter is the trigger point for an acceleration to the downside with 95.555 the next likely target.

Overtaking and sustaining a move over the downtrending angle will mean the selling is getting weaker and the buying is getting stronger. This would indicate that the index is setting up for a short-covering rally.