Talking Points:

- Trading below 94.29, the DXY Index is threatening to break its sideways range since October 26 and its uptrend from the September 8, 20, and October 13 lows.

- With Fed funds pricing in a 100% chance of a hike in December, progress of tax reform legislation is the key driver for the US Dollar.

- Retail trader sentiment had previously shifted to a neutral USD outlook, suggesting that a turn may be coming.

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Ever since October 26, when Fed funds futures first fully priced-in a 100% chance of a 25-bps rate hike in December, the US Dollar (via DXY Index) has been trading sideways. With monetary policy essentially removed as a near-term catalyst, the main driver for the US Dollar has come from the fiscal side: the progress of tax reform legislation.

While the US economic calendar has some important data in the days ahead, the mere fact that Fed funds are locked in at 100% for December means the upcoming data won't carry the same weight it normally does. This has created a bit of asymmetric risk for the greenback: good news is fully priced-in; bad news is not.

Concurrently, this means that even a little bit of positivity from one of its currency counterparts could leave a sizeable impact. Such is the case today where, in aggregate, a lack of progress on US tax reform, more risk aversion globally, and a bout of better than expected Euro-Zone economic data have easily knocked the US Dollar back.

Chart 1: DXY Index Daily Timeframe (July to November 2017)

DXY Index Threatening to Break Three-Week Range, Two-Month Uptrend

As such, the US Dollar is looking increasingly vulnerable in the near-term, with not only the two-week range from October 26 threatening to break, but the uptrend from the September 8, 20, and October 13 lows coming under pressure as well. The neckline of what could be viewed as a potential inverse head & shoulders pattern at 94.29 is also being tested today. Momentum has started to swing lower as well, with the DXY Index trading below its daily 8-, 13-, and 21-EMAs, and MACD and Stochastics trending lower (albeit in bullish territory still).

Read more: FX Markets Volatility Set to Rise with Busy Calendar: UK, US, & Canadian Inflation Due

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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