Mapping the Market: Threats to dollar rebound emerge

June 1 (Reuters) – The U.S. dollar shows several warning signs on daily charts that suggest its latest recovery attempt may be losing ​strength.

The dollar has been at the mercy of changing sentiment on the Iran war and the effect of ‌the conflict on inflation and economic growth. The U.S. currency initially rallied at the start of hostilities, before weakening in April.

The dollar index – a gauge of the U.S. dollar against six major currencies – had shown signs of a recovery and reached its highest level in about ​seven weeks on Thursday.

That move filled a price gap left from the April 7 low, before the ​dollar reversed sharply lower. In technical analysis, filling an old gap – a space between prices where ⁠no trading takes place – can sometimes mark the end of a rebound rather than the beginning of a rally.

Another ​sign of fading momentum comes from the relative strength index, or RSI, a tool traders use to judge how strong ​a move really is. While the dollar index reached a short-term high, the RSI did not match it. That disparity, known as a bearish divergence, can be an early signal that buying power is weakening.

At the same time, a candlestick chart of the dollar showed what ​technical analysts call a daily inverted hammer candle. That candle suggests buyers briefly pushed higher but could not hold those ​gains, allowing sellers to regain control. This occurred as the rally stalled near structural resistance around 99.50 to 99.60, according to data ‌supplied by ⁠LSEG.

Structural resistance is where an asset historically tends to encounter selling and thus struggles to push above.

For now, the dollar remains within the consolidation range that has held since May 15, meaning the market is still moving sideways rather than trending decisively lower. But that balance could shift if the index falls below the 98.90 area. A break under that ​would strengthen the view that ​the rebound has ended, opening ⁠the way for a deeper pullback.

Such a move would also push it down nearer to another bearish signal in the 97.60/65 area. A decisive move below there would negate an inverse ​head-and-shoulders pattern that had been forming and raise expectations of further losses. An inverse ​head-and-shoulders formation is ⁠considered bullish if completed, as it occurs after a spate of losses and is often followed by gains.

What the chart shows:

(Daily markets commentary from Reuters analysts on the signals financial charts are sending – and what they might mean.)