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Talking Points:

- Subtle changes in language used by various Fed policymakers have traders starting to think that a more pronounced dovish shift in tone is coming; Fed Chair Jerome Powell speaks tonight; the November FOMC meeting minutes will be released tomorrow.

- Tensions have eased on the Brexit front as UK PM Theresa May will allow parliament to submit ammendments to the deal she crafted.

- Retail traders continue to fade advances by the US Dollar, leaving EUR/USD and GBP/USD with bearish outlooks.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

The US Dollar (via the DXY Index) is holding onto its gains from the first two days of the week, gearing up for what should be a much more meaningful second half. While most attention over the past few weeks has been paid to Brexit's impact on the British Pound and the Italian budget saga on the Euro, focus will return back to the Federal Reserve and the US Dollar.

With the DXY Index just off of its yearly highs and energy markets around the world in turmoil, it's easy to foresee a softer inflation environment materializing over the coming months. Concurrently, with the impulse from fiscal stimulus (the Trump tax plan) fading, the topline rate of US growth is due to subside.

From a messaging standpoint, the current fundamental reality and its prescribed policy solutions run afront to what the Federal Reserve has been doing (and thus far continued to signal its intention to do so). As such, it is anticipated that Fed Chair Jerome Powell uses his speech tonight to temper the hawkish perception around Fed policy and paint a more dovish picture for rate hikes in 2019.

Should Fed Chair Powell hint at language reassessing the rate hike cycle, the US Dollar is vulnerable up near its yearly highs; rates markets are pricing in the end to the Fed hike cycle in 2019. The dissonance between what the Fed is saying it intends on doing and what the market believes the Fed will do has grown to the point where resolution will likely come at the US Dollar's detriment.

With Fed Chair Jerome Powell's speech on Wednesday and the release of the November FOMC meeting minutes on Thursday, markets will see just how dovish the Fed is becoming in light of recent moves in energy markets and inflation data.

DXY Index Price Chart: Daily Timeframe (January to November 2018) (Chart 1)

DXY Index Hovers Below Yearly Highs Before Powell Speech

The continued float higher by the DXY Index hasn't altered the technical picture. Price remains above its daily 8-, 13-, and 21-EMA envelope, but both daily MACD and Slow Stochastics are not pointing higher. The DXY Index appears to be in a 'melt up' situation towards the yearly high at 97.69 (although indicators are have diverged due to the lack of conviction in price action). A loss of upside momentum would be noteworthy below 96.04.

Read more: More Pressure on EUR and GBP Keeps the DXY Index Afloat

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

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

Follow him on Twitter at @CVecchioFX