Dollar bulls have reason to cheer, but not just yet

YTD performance of the major currencies bloc vs the US dollar

The greenback may be the strongest currency on the week by a margin, but the real test on whether or not this is a sign of recovery in the dollar is only beginning.

Among the major bloc, the dollar remains the third weakest currency - only ahead of the aussie and the loonie. If you look at the market right now, the reasons to be bullish on the dollar are the same reasons we had at the start of the year as well.

The Fed are hiking rates - and possibly at a much faster pace. Treasury yields are rising. Inflationary pressures are building up. The economy remains relatively solid. And yet the dollar was sold to kick off 2018.

Was it politically driven? One might argue so, but you don't fight a market trend when it is that strong at the time. As traders, we must always adapt and be flexible - more so when markets are changing at the pace they are right now.

The dollar's rebound this week sees it move just above the downward trendline formed from December to January. That's a key level to break to justify that this move is no mere correction.

The bounce this week also sees the dollar rebound from 3-year lows, and it coincides with support at the 61.8 retracement level as well.

For now, dollar bulls may have some encouragement to believe - but there's still some way to go to say this is the start of a comeback. Keep in mind, the dollar has fallen for the past four quarters (all of 2017) since Trump took office.

And there's still the shadow of the swelling fiscal deficit and the mid-term elections looming over the greenback's backstory this year.