The US dollar index (DXY) has crashed hard in the past few weeks, erasing all gains made earlier this year and moving to its lowest level since July 2023. It has plunged by over 9.35% from its highest point this year. This article explains why the DXY index may crash further after forming a bearish chart pattern.
US dollar index has formed an inverse cup and handle
The daily chart shows that the DXY index has formed several highly bearish chart patterns. First, and most importantly, it has created an inverse cup and handle pattern, a highly bearish continuation sign in the market.
This pattern is made up of a rounded top, a horizontal support level, and some consolidation. In this case, the horizontal support line is at $100.15, while the rounded top is shown in black. The index is now forming the consolidation phase, which is part of the handle section.
This cup has a depth of about 10%. Therefore, measuring the same distance from the lower side of the cup gives the US dollar index a target of $90, meaning that it may crash by that same margin.
The US dollar index has formed a death cross pattern as the 50-day and 200-day moving averages crossed each other last week. Also, the Relative Strength Index (RSI) and the MACD indicators have continued pointing downwards.
Therefore, the DXY index will likely continue falling as sellers target the key support at $90. The bearish outlook will become invalid if the index rises above the key resistance at $103.30.
DXY index has bearish fundamental issues
The US dollar index has numerous bearish fundamental issues that may push it lower soon.
First, there is a lingering question on the health of the American economy as Donald Trump’s tariffs continue. Trump has announced a 145% tariff on Chinese goods, an extremely high figure that will disrupt trade flows worth billions of dollars annually.
China has also responded to these tariffs by announcing a 125% tariff on US goods. It has also announced a plan to ban rare earths exports to the US. On Tuesday, Beijing directed its companies against placing orders from Boeing, This means that Airbus will continue accumulating orders from China, the largest market globally.
Second, the US dollar index has plunged as more fund managers remain bearish on the currency. A survey released on Tuesday showed that US dollar bearishness among large investors rose to the highest point since 2006. 61% of all respondents believe that the currency will crash in the next 12 months.
Third, the ongoing US dollar index crash is part of Trump’s policies to boost exports as a weaker dollar makes US goods cheaper abroad. Indeed, the administration is working on the so-called Mar-a-Lago accord, which aims to weaken the greenback a bit.
Further, there are fears that the Federal Reserve will continue cutting interest rates in the next few weeks as recession risks rise. Indeed, some Fed officials have already hinted that the bank will be ready to support the economy as they have done before.
Therefore, a combination of a death cross on the daily chart and an inverse cup and handle pattern means that the DXY index will continue falling in the coming weeks.
However, this decline does not mean that the end of the US dollar as a safe haven currency. This performance is just a normal action during market cycles as we are today.
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