DXY trains head and shoulders before FOMC

US Dollar Index, DXY, Federal Reserve Interest Rate Decision, FOMC, Coronavirus – Talking Points:

  • The stock markets trended cautiously during APAC trading.
  • USD may come under further pressure as the FOMC the rate decision comes to the fore.
  • the US dollar The Index (DXY) is likely to experience prolonged declines as price plots a downtrend Head and Shoudlers.

Asia-Pacific recap

Stock markets rallied cautiously during Asia-Pacific trading as investors focused on the Federal Reserve’s next monetary policy meeting. Japan Nikkei 225 Soared 0.3%, Hong Kong’s Hang Seng rose 0.17%, and China’s CSI 300 rose 0.18%.

Australia ASX 200 The index slipped 0.65% as a larger-than-expected rise in the country’s annual inflation rate suggests the Reserve Bank of Australia may need to adjust its monetary policy parameters ahead of schedule. In the foreign exchange markets, AUD, NZD and GOUJAT all slipped lower relative to their major counterparts, while the USD and CHF has gained ground.

Gold and money price drifted lower as 10-year US Treasury yields held steady at 1.04%. Looking ahead, the FOMC monetary policy meeting is making headlines alongside US durable goods orders for December.

US Dollar Outlook: DXY Forms Head and Shoulders Ahead of FOMC

DailyFX Economic Calendar

Dovish FOMC to keep USD on the back

The US dollar may face further pressure against its major counterparts in the near term, as attention turns to the upcoming Federal Open Market Committee (FOMC) monetary policy meeting. The central bank is expected to keep its monetary policy parameters stable while recalling that accommodative monetary policy conditions are expected to continue for the foreseeable future.

At its previous meeting, the Federal Reserve said it would continue to buy at least $ 80 billion in treasury securities and $ 40 billion in agency mortgage-backed securities per month “until further substantial progress has been made towards the Committee’s maximum employment and price stability objectives “. .

However, with a noticeable drop in coronavirus infections in recent days and a significant increase in the vaccination rate, there is a realistic possibility that the country will start to return to some form of normality in the second trimester. This could encourage some members of the Fed push for the central bank to start cutting back on purchases later this year.

US Dollar Outlook: DXY Forms Head and Shoulders Ahead of FOMC

Source – Worldometer

That being said, with weekly jobless claims continuing above $ 5 million and the annual inflation rate still significantly below the Fed’s average inflation target of 2%, it seems relatively unlikely that the bank Central hints at reducing its asset purchases at the next meeting.

Indeed, Boston Fed Chairman Eric Rosengren has said he “expects it to take a little while before we even talk about cutting back on our purchases of government securities and mortgages.” This statement reinforces the comments of Vice President Richard Clarida that “its economic outlook allows us to maintain the current pace of purchases until the end of the year. [and] it may take some time before we think about slowing down the pace of our purchases ”.

Therefore, ensuring flexible monetary policy conditions, along with the intensification of the additional deficit spending, could continue to weaken the greenback against its main counterparts and ultimately lower the US dollar index (DXY) in the coming months.

Daily US Dollar Index (DXY) chart – bullish potential capping at 50 MA

US Dollar Outlook: DXY Forms Head and Shoulders Ahead of FOMC

DXY daily chart created using Tradingview

From a technical standpoint, the US Dollar Index (DXY) looks poised to continue pushing lower, with the price not breaking above the 50-day moving average (90.64) and remaining within the limits of a descending channel.

With the RSI descending below 50 and the MACD preparing to cross back below its “slower” signal line counterpart, the path of least resistance appears to favor the downside.

A daily close below the psychological support at 90.00 would likely intensify the selling pressure and open the door for the index to retest the range support at 89.20 – 89.40.

Compensation which likely signals the resumption of the main downtrend and brings 2018 low (88.25) back in the crosshairs.

Alternatively, rising above the 21-EMA (90.30) could pave a way for buyers to challenge the resistance of the descending channel and the psychologically imposing bar of 91.00.

US Dollar Index (DXY) 4-Hour Chart – Head and Shoulders Trend Hints for Further Losses

US Dollar Outlook: DXY Forms Head and Shoulders Ahead of FOMC

4 hour DXY chart created using Tradingview

Zooming in on the four hour chart reinforces the bearish outlook depicted on the daily period as prices establish a Head and Shoulders reversal pattern above the range support at 89.95 – 90.05.

A convincing break below 89.90 is needed to validate the bearish reversal pattern and propel the index towards the annual low (89.21), with the implied measured movement suggesting that the price could fall 1.4% from current levels to test March 2018 low (88.94).

On the other hand, staying constructively perched above 90.00 could allow buyers to push the index back to the January 26 high (90.61).

– Written by Daniel Moss, Analyst for DailyFX

Follow me on twitter @DanielGMoss

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