Dollar stays tight, building up strength for breakout

Moderately positive stock market dynamics yesterday was combined with a slight 0.1% increase in the dollar index to 92.2 after two days of decline from 92.8.

The Dollar Index is now near the upper end of the converging trading range since last October. Also, a pullback is forming on the daily charts after touching the overbought area of the RSI index.

Therefore, the short-term technical picture is now on the side of the dollar bears, suggesting a further correction after last month’s rally.

Also, falling long-term bond yields are playing against the dollar. In contrast to last week, this move is increasingly linked to easing inflation fears and central bank actions pushing interest rates, including 120bn monthly Fed purchases.

At the same time, it is worth separating the short-term momentum from the longer-term trend. The latter could well be on the side of the dollar as the US economy recovers more strongly, and the Fed could prove to be the flagship of monetary policy normalisation.

Globally, the dollar has remained without a pronounced trend, forcing a closer look at the latest extremums. A firm break beyond these levels would be a signal for a further move in the breakout direction.

Short-term downward momentum is more plausible, causing us to look closer to the 200 SMA, which passes through 91.35. A decisive break below this level would open the way towards 89.60, the lower boundary area narrowing the trading range. Only a break of this area would revive bets on a global multi-year dollar decline.

The US advance on the stimulus rollback and solid economic growth leaves a moderately bullish scenario for the dollar on the table, whereby a pullback of the DXY to the 200-day average would once again attract buyers.

A slight pullback in the dollar might draw the buyers, ending a long consolidation by breaking through the upper 92.7 range boundary. A break-up will be confirmed by a move above 93.4 (previous peak area). The balance between the bulls and the bears is very tight due to the pandemic heightened uncertainty. However, traders and investors should note that a prolonged consolidation leads to a compressed spring effect: the longer the range is compressed, the stronger the subsequent trend in the direction of the breakout will be.

The FxPro Analyst Team