Where does the Dollar go to from here?
With the Fed rate hike now done with, the markets still remain uncertain on the direction of the US Dollar as some economists expect the US Dollar to continue drift higher but albeit at, a slower pace while, on the other hand, some economists expect the US Dollar to weaken here on. The main issue with the US Dollar Index in consideration with the Fed’s rate hike is that the markets are not yet convinced that this monetary policy tightening cycle will be like the previous ones with regular rate hikes. The Fed mentioned that the pace of rate hikes will be gradual and not measured, in reference to the Fed’s dot plot which shows 4 rate hikes next year with a 25bps increase every time. The Fed funds futures rate are only pricing in two rate hikes next year which is one of the main reasons for the uncertainty. There is also a growing echo that the US could be heading into a recession as the US economy is at best steady and not growing. Adding to this view is the deflationary factors such as a weaker Yuan and falling commodity prices which continue to signal an era of low inflation.
US Dollar index – Technical Analysis
The weekly chart for the US Dollar shows this week’s candlestick bullish and attempting to break the median line. However, prices have retreated from this week’s high-to-date of 99.34. We noted that the support/resistance zone near 98.41 – 97.98 will be a key level to watch for. What’s interesting is that the test of 97.28 support was merely a quick rejection with no close at this level, which could indicate that another move down to 97.28 is likely with prospects of a closing price testing this support level. In the event that the 97.28 support gives way, the bias in the US Dollar Index could be slowly shifting to the downside. Price will need to break out from the lower median line where we expect to see a confluence between the minor trend line connecting the highs of the week ending 12th April 2015 at 100.27 and the highs of 98.41 for the week ending 2nd August 2015. This falling trend line could offer some dynamic support for the moment.
On the daily chart, the current bullish momentum we see comes off a breakout from a minor falling wedge pattern. Prices broke out with a strong bullish candlestick and continued to push higher. The 99.28 level has been strong with two daily sessions seeing price rejection here. Plotting a new falling median line, we expect the gap to be filled and a possible move to 97.86 – 97.59 level of support which shows confluence with many different patterns. As always, the 97.28 will be a key support level of mention. A break below 97.28 could signal a quick move lower to 94.55 with the possibility that the minor support at 96.64 – 96.36 could offer a short term bounce.
To conclude, there is a strong possibility that a top might have been formed at the 100 level and post rate hike, the US Dollar will be looking lower to establish support before any hopes for another bull rally can be revived.