The Dollar index’s strength has been questionable for the last two weeks after the Greenback considerably declined for two consecutive Friday’s. While the first decline was probably shrugged off due to a mixed non-farm payroll data, which overall looked strong, the second decline last Friday, despite a better than expected retail sales saw most of the USD crosses rally across the board by as much as 50 pips.
From a broader perspective, the US economic outlook seems to be on the road to recovery, although second tier data came out mixed. The biggest factor supporting the USD bulls is the Fed’s exit from QE especially at a time when countries like Japan are in a technical recession and expanding their QE program and the Eurozone which barely managed to come a few points above economic contraction which continues to draw speculation on the Eurozone wide QE purchases.
Interest rates hike and offloading of the Fed’s bloated balance sheets will be the primary drivers at least in the short term. Comments from Fed members in recent weeks have called for patience and that the focus shouldn’t be too much on how the Fed will offload its balance sheets, amassed by years of purchasing government debt.
Technically, the USD Index continues to trade within and near to the sharp rising price channel. The most important point of note here is that the recent declines managed to establish an important support/resistance level near 87.5 handle. Trading within the price channel, USDX now has enough room to at the very least rally towards the recent highs made near 86.3 handle.
When switching to the daily charts, we do notice that downside risks do remain as noted by the divergence to the RSI, which points to a more reasonable decline towards 86.8. The question of course remains whether the decline will happen first, or if price will rally to form resistance near the recent highs and then starts its descent.
Currently, we do notice a strong consolidation taking place and the index, trading close to the potential resistance level at 88.4 regions. As long as the USDX remains within the range, highlighted by the rectangle, we can expect to see some sideways price action in most USD pairs. The daily charts do however hint towards a brief rally to 88.4 regions before a decline towards 86.8, to correct the divergence formed.
Last month’s FOMC statement was hawkish and one which surprised the markets. Considering that it was only the meeting before that the Fed had highlighted its concerns of an appreciating Dollar in the background of a global slowdown in the markets, whose case has been strengthened in recent times with countries such as Japan and the Eurozone. In this context, while the markets at large were expecting another dovish to a neutral tone from the Fed, the Fed’s statement was hawkish, underlining the strength and pick up in the labor markets. Today’s FOMC meeting minutes are likely to add more ‘color’ to this hawkish theme. Markets will be mostly focusing on the ‘considerable time’ language which could possibly give clues towards future language in the December meeting.