U.S. Dollar Stalled by Resistance on Charts as Profit Taking Seen Ahead

• USD index repelled by major resistance on charts
• Taking breather after paring half of 2020’s declines 
• Some analysts flag risk of profit-taking short-term
• As others stay bullish citing charts & fundamentals

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The Dollar Index backed away from a fresh 16-month high in the midweek session after colliding with a major technical resistance level on the charts and as some analysts warned that a short period of profit-taking could now be likely following a four week stretch of gains by the greenback.

Dollar losses were shallow but widespread on Wednesday as major counterparts caught a break from a bruising run of losses that had been exacerbated as recently as Tuesday when retail sales data suggested that U.S. consumer spending was already accelerating even before the festive season opens.

The U.S. Dollar Index, which measures the greenback against six of its most frequently traded counterparts, reached its highest level since July 2020 in overnight trading that saw the benchmark probing briefly above the 50% Fibonacci retracement of its 2020 decline before retreating back beneath it.

“USD has exceeded our expectations; DXY is within striking distance of our forecast of 96 set for 1Q22. DXY was lifted in the overnight session by its weakest components i.e., the negative-yielding currencies led by JPY (-0.6%), CHF (-0.5%) and EUR (0.4%),” says Philip Wee, an FX strategist at DBS Group Research in Singapore.

“We remain wary of the DXY’s major resistance around 96.1 or its 50% Fibonacci retracement level. Profit-taking might set in ahead of the US Thanksgiving holidays next week (25 November),” Wee and colleagues warned in a Wednesday commentary.

Above: U.S. Dollar Index shown at weekly intervals with major moving-averages indicating prior areas of technical resistance and Fibonacci retracements of 2020 fall indicating possible areas of further resistance ahead.

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Wee and the DBS team cite recent communications from the European Central Bank (ECB) and the Bank of Japan (BoJ) for the Dollar benchmark’s gains after both made clear this week that they expect to trail behind the Federal Reserve (Fed) when it comes to changes of monetary policy.

Markets have come to expect the Fed and many others including the Bank of England to begin reversing the interest rate cuts they announced last year at the onset of the pandemic once into 2022, although the BoJ and ECB have remained adamant that such expectations are misplaced in their cases.

Governor Haruhiko Kuroda told media in a speech from the BoJ’s Nagoya branch on Monday that the bank “will absolutely not consider dialing back or abandoning ultra-loose policy” any time in the near future and cited an absence of sufficient inflation pressures barely a day after official figures revealed a steeper-than-expected contraction of the world’s third largest economy for the third quarter.

“The material undershoot in activity comes as PM Kishida prepares to release a fresh fiscal stimulus package. BoJ Governor Kuroda has underlined that it’s desirable for FX to reflect fundamentals which in the context of the GDP miss validates USD/JPY dips proving limited,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets in a Tuesday research note.

The BoJ’s stance cements the Yen in place as the worst performing major currency of the year, although increasingly hard on the heels of the Japanese currency is Europe’s unified unit, which set new 2021 lows against almost all of its nearest rivals this week after a similar message from European Central Bank President Christine Lagarde weighed on the Euro and in the process put wind into the Dollar’s sails as a bore down on EUR/USD.

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“A near‑term lift in EUR will be challenging while the ECB continues to push back strongly against current market pricing. ECB President Christine Lagarde warned again recently that conditions to start raising the policy rates ‘are very unlikely to be satisfied next year,” says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia.

Euro and Yen losses have been steep in 2021 and are tantamount to a shot in the arm for the U.S. Dollar Index because the two currencies account for a little more than 70% of the market flows measured by the barometer, although increasingly ‘hawkish’ market expectations for Federal Reserve interest rate policy have also stoked investors’ appetites for the greenback in its own right.

All of these factors had left the Dollar benchmark on course for four weeks of back-to-back gains by Wednesday and had lifted its 2021 appreciation to more than 6% in price action that also saw multiple technical resistance barriers demolished on the charts, which has gotten some analysts flagging scope for a medium-term recovery of the 100.0 level last seen in May 2020.

“The US Dollar Index has broken higher through key resistance and while there is general Dollar strength, this is being distorted by a very weak Euro,” say Karen Jones and Axel Rudolph, both technical analysts at Commerzbank, writing in a Tuesday presentation.

“It is underpinned by the 93.79 2021 uptrend, and while above here we will look for further US Dollar gains to the 96.10 then 97.73 Fibo resistance. We are also above the 55-month moving-average and have pretty much based, which implies scope for 100+ longer term,” they also said.

Above: Commerzbank chart featuring U.S. Dollar Index, technical indicators and analysis.