- The DXY Index has fallen back to the daily 21-EMA, previously resistance on a closing basis between June 22 and September 20.
- The September 20 FOMC meeting sparked a bullish outside engulfing bar in DXY; the minutes should reveal the inner workings of what was perceived as a hawkish meeting.
- Retail trader sentiment suggests the near-term outlook for the US Dollar is neutral.
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The US Dollar has stabilized after three straight down days on the cusp of what should be a bullish stretch of data and events through the end of the week. The underlying factors of the DXY Index's recent rally - the rise in US Treasury yields on the back of Fed rate hike expectations repricing - remain intact, although it is worth noting that correlations between the US Treasury 10-year yield and pairs like USD/CHF and USD/JPY have fallen back in recent days.
Clearly, the US Dollar needs a positive spark if the DXY Index is going to hold the daily 21-EMA as support, a moving average that provided resistance (on a closing basis) for three months. Enter the September FOMC meeting minutes, due out today at 14 EDT/18 GMT.
The Federal Reserve’s September policy meeting was a turning point for the US Dollar: the DXY Index established a bullish outside engulfing bar and pierced its daily 21-EMA for the first time since June 22. But the technical reversal was not without a fundamental driver.
The FOMC’s decision to signal to markets that it intended on fulfilling its preset course for interest rates – as laid out initially in the December 2016 summary of economic projections (SEP) – by raising rates a total of three times in 2017 and another three times in 2018 caught market participants off guard: there was only a 45% chance of another rate hike by the end of the year; and only two hikes were priced in for 2018.
Now, rate hike expectations have firmed up sharply (76% chance of a hike before the year is out, and two-and-a-half hikes are priced in for next year) – look for the FOMC minutes to reinforce this development that has carried the US Dollar higher over the past three weeks.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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