US dollar looks to FOMC meeting next week

Apr 22, 5:33 am

The US dollar index has failed to make any decent gains or losses this week as the index sits near the support level.

Summary:

  • Intra-week the dollar fell sharply on weak housing starts and building permits
  • Labor markets remain strong in the US with the weekly claims posting the lowest level, last seen in November 1973
  • Short term rally in the dollar index is evident but FOMC meeting next week will be defining

The US dollar index did not see much of a movement this week with prices still stuck close to the support level, despite last week’s bullish engulfing weekly bar. It was the housing market data which sent the dollar lower briefly before the trade-weighted index managed to pull back off the weekly lows 93.85. As of last week, the CFTC’s weekly CoT position data showed that speculators remain bearish on the dollar. Cutting their bullish bets to $0.4 billion in the week ending April 12th, it marked the lowest levels in the dollar since late January 2009 and was marked by the sixth week of consecutive declines. Fed Chair’s Janet Yellen’s cautious stance and the fact that the Fed could move gradually has led to the dollar bulls to lighten up on their bullish bets. It has also helped investors to pool back into riskier assets as well, especially emerging markets and high yielding currencies.

But earlier this month, Boston Federal Reserve President, Rosengren cautioned that the markets could be underestimating the Fed’s tightening plan. The US Federal Reserve will be meeting next week, but it is largely expected to be a non-event. However, the tone of the FOMC statement could be of importance as it opens up the scope for a potential June rate hike (which is being questioned by many considering that the June FOMC date falls close to the UK’s referendum date).

US Dollar Technical Outlook

The weekly chart for the US dollar shows nothing much happening as prices remain trading within the 94.5 – 94.0 support within the falling wedge pattern after prices broke out to the downside following the lower median line break. To the upside, 96.50 is a key level to watch for as a break above this minor resistance could send the dollar to 98.50 – 98.0 where we anticipate a potential right shoulder to form if prices reverse off this major resistance.

US Dollar Index – Price at 94.5 – 94.0 support
US Dollar Index – Price at 94.5 – 94.0 support

On the daily chart, the US dollar index fell back to 94 but the fact that prices failed to break lower indicates a strong support level here and could see a near-term move to the upside. Price action, however, needs to be convincing for this to happen. 96.0 – 96.50 level of resistance will be closely watched which could act as an initial resistance to the gains. A break above this level could see a test to 97.5 – 97.25 region.

US Dollar Index- Daily Chart, breakout from the falling wedge pattern
US Dollar Index- Daily Chart, breakout from the falling wedge pattern

To conclude, we expect the US dollar to post a modest recovery in the near term, but watch for price action as it gets closer to the 96.50 – 96.0 handle which could come in as resistance. Alternately, if the US dollar index manages to rally to 98.0 – 98.5 and fails at this resistance and moves lower, we could have a strong head and shoulders pattern taking shape.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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