The US dollar index is struggling to post gains and also hold onto its former monthly gains after Federal Reserve Chair Jerome Powell signalled a faster conclusion of tapering asset purchases in the face of rising inflation.
The US dollar initially gained after Powell’s statement and has now given back also of its early gains. This is causing traders to scratch their heads in regard to why the greenback is not rallying.
Much depends on when Federal Open Market Committee (FOMC) members will discuss the possibility of concluding tapering quicker at their next meeting on Dec. 14-15. Although based on the recent FED comments, tapering looks assured alongside a rate hike.
Powell said “The economy is very strong and inflationary pressures are high. It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases perhaps a few months sooner,” he said in testimony before the Senate Banking Committee.
It also true that the Omicron variant could provide some problems, as acknowledged yesterday by the FED. The FOMC announced after the conclusion of its two-day meeting on Nov. 3 that it will start winding down its $120 billion asset purchases this month, and it is expected to be concluded by mid-2022. If Omicron worsens, tapering may slow.
Many top currencies are now posting gains against the buck, so it remains to be seen if a major top is in for the greenback. I believe a breakout from the 94.80 to 97.00 price range will hold a clue.
The ActivTrader market sentiment tool is showing that some 93 percent of traders are bullish towards the US dollar index. This is bad news bulls as typically such overstretched sentiment from the retail crowd usually hints that a big price reversal could be on the horizon.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, the technicals look bearish, with the US dollar index officially forming a large head and shoulders pattern, which is a bearish reversal pattern.
According to technical analysis, a break under the 95.40 level will activate this huge bearish price pattern, so please do be mindful of a strong pullback around current levels.
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US Dollar Index Medium-term Technical Analysis
The medium-term picture for the US dollar index looks to be very bullish above the 94.80 level looking on the weekly and daily time frame. This is formerly the top end of the multi-year price range for the greenback.
Simply put, if the 94.80 level continues to hold then further strong gains back to 97.00 or 98.00 is very likely. Weakness under the 94.80 level and things change dramatically for the buck, and not in a good way.
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