Dollar bulls dominated the G10 space on Monday after Jerome Powell was nominated for a second four-year term as Fed chair by President Joe Biden. Lael Brainard, the other-front running candidate for the job will be vice chair, the White House announced.
The Dollar Index (DXY) extended gains to hit a fresh 16 month high beyond 96.50.
We also witnessed some action on the equally-weighted dollar index which approached resistance at 1.1120.
Powell’s renomination was certainly a welcome development for the greenback, as this meant policy continuity in a post-pandemic landscape where US inflation was at a 30-year high.
Markets now expect the Fed to raise interest rates from near zero in June 2022 - something that could fuel the dollar’s upside gains. It's worth keeping in mind that US inflation remains hot and the US labour market is on the road to recovery, fuelling speculation over the Fed acting sooner than expected. Generally, higher interest rates tend to attract foreign investment, increasing the value of the country’s currency.
With bulls kicking off the week in a position of power, the path of least resistance for the dollar may remain north.
Nevertheless, there are some key economic reports which could impact the greenback’s short-term trajectory. Much attention will be directed towards the Markit PMI’s for November scheduled for release on Tuesday. Mid-week, all eyes will be on the US weekly initial jobless claims, 3Q GDP (second estimate), and October's PCE deflator among other economic important data. Most importantly will be the release of the November FOMC’s meeting minutes which could provide insight into how the discussions might have played out. It will be interesting to see whether more policymakers were leaning towards moving their dot plots when they meet in December for the last time in 2021.
Should the minutes strike a hawkish tone, this may propel the mighty dollar higher. Alternatively, if the minutes come across as dovish – dollar bears may re-enter the scene.
Keep an eye on the USD.
Watch this space as the equally-weighted USD Index could be gearing up for a major breakout. Prices are already bullish on the daily and weekly timeframe with monthly in the process of creating a fresh higher high. It's all about how prices react to the 1.1120 resistance level.
The last time the index secured a strong daily close above this level was back in November 2020. A solid break above this level could lead to further strength, with bulls targeting 1.1150. Now, this is where things get interesting…
If the upside momentum propels prices beyond 1.1150, the equally-weighted USD Index could test 1.1250 and 1.1330. If 1.1120 proves to be reliable resistance, prices may decline back towards 1.1040 and 1.0930.
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