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US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

Daniel Moss, Analyst

US Dollar Index, DXY, FOMC, Asset Purchases, Coronavirus – Talking Points:

  • Equity markets paused for breath during Asia-Pacific trade.
  • FOMC meeting minutes may define the near-term outlook for the US Dollar.
  • US Dollar Index (DXY) eyeing yearly lows after crashing through key support.

Asia-Pacific Recap

The rally in global equity markets slowed somewhat during Asia-Pacific trade, as investors weighed vaccine progress against a continued rise in coronavirus infections.

Australia’s ASX 200 climbed 0.59% while Japan’s Nikkei 225 extended its push to 29-year highs, rising 0.50%.

China’s CSI 300 index fell 1.2% on news that three state-owned companies had missed their scheduled debt repayments.

In FX markets, the cyclically-sensitive AUD, NZD and CAD slipped lower against their haven-associated counterparts, while the US Dollar clawed back lost ground.

Crude oil prices continued pushing higher despite an unexpected increase in US inventories, with API data showing a 3.8 million barrel build in the week ending November 20.

Looking ahead, US jobless claims and PCE data may prove market-moving ahead of the release of the FOMC November meeting minutes.

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

Market reaction chart created using TradingView

US Dollar May Slide on FOMC Minutes

The upcoming release of the minutes from the Federal Open Market Committee’s November monetary policy meeting may dictate the near-term outlook for the heavily under-fire US Dollar.

A string of positive vaccine results has severely undermined the haven-associated Greenback, with investors rotating capital into growth-sensitive assets and higher-beta currencies.

Clinical results showing that the vaccine developed by the University of Oxford and AstraZeneca was, on average, 70% effective in preventing infections has fuelled market optimism, building on strong results from Pfizer and Moderna earlier in the month.

Moreover, recent fundamental data prints portray an economy resiliently withstanding a third wave of Covid-19, with the IHS Markit Composite PMI recording its steepest rise in over 5 years in November, preliminary estimates showed.

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

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However, these positive developments may fail to convince the Federal Reserve to keep its monetary policy settings steady, considering initial jobless claims rose unexpectedly in the week ending November 14 and several states have markedly tightened coronavirus restrictions.

Indeed, Chairman Jerome Powell and his colleagues discussed the central bank’s asset purchases and “the ways in which we can adjust the parameters of it to deliver more accommodation if it turns out to be appropriate” at the FOMC meeting in November.

That being said, several members of the central bank have suggested that the current bond purchasing program should be kept as is, with New York Fed President John Williams stating that “I think they’re serving their purposes really well right now”.

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

St Louis Fed President James Bullard echoed his colleague’s comments, stating that “I do think we have a robust program in place right now [and] I don’t see any reason to change at this point”.

Nonetheless, with Treasury Secretary Steven Mnuchin refusing to extend several of the Federal Reserve’s lending facilities past December 31, and hospitalizations due to Covid-19 skyrocketing, the central bank may look to act sooner rather than later.

To that end, investors will likely scrutinize the FOMC’s meeting minutes for further clarity on the central bank’s outlook, with the suggestion of further easing likely exacerbating the US Dollar’s decline.

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US Dollar Index (DXY) Daily Chart – Eyeing Yearly Low

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

DXY index daily chart created using Tradingview

From a technical perspective, the US Dollar Index (DXY) seems poised to challenge the yearly low set on September 1 (91.75), after failing to clamber back above resistance at the July low (92.55).

With the RSI sinking below 40 and the MACD indicator tracking firmly below its respective midpoint, the path of least resistance seems skewed to the downside.

Ultimately, a daily close below the September low is needed to signal the resumption of the primary downtrend and bring the 38.2% Fibonacci (91.16) into play.

Alternatively, pushing back above 92.50 could neutralize near-term selling pressure and open the door for prices to challenge confluent resistance at the trend-defining 50-day moving average (93.25) and 8-month downtrend.

US Dollar Index (DXY) 4-Hour Chart – 61.8% Fibonacci May Ignite Short-Term Rebound

US Dollar Price Outlook: DXY Eyeing Yearly Lows Ahead of FOMC Minutes

DXY 4-hour chart created using Tradingview

However, zooming into the four-hour suggests that prices may rebound higher, as prices holds constructively above key support at the 61.8% Fibonacci (92.06) and Andrews’ Pitchfork median line.

The development of the RSI hints at building bullish momentum, as the oscillator creeps tentatively back towards its neutral midpoint.

That being said, an extended topside push looks relatively unlikely given price is tracking firmly below all four moving averages and the MACD indicator is continuing to travel in negative territory.

Nevertheless, the DXY could clamber back towards the 21-MA (92.33) if support at 92.00 remains intact, with a breach of the July low (92.55) needed to bring psychological resistance at 93.00 into focus.

Conversely, piercing the November 23 low (92.02) would probably signal the resumption of the primary downtrend and propel price towards the yearly low (91.75).

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.