USDX Retracement Continues, For How Long?
The US Dollar Index continues to rally since the Federal Reserve decision last week, reaching as high as 93.60’s at the end of the US Session yesterday.
However, the rally has stalled since the beginning of the European session today, declining back all the way to 93.30’s ahead of some key economic releases today.
USDX Key Resistance Area
The US Dollar posted three days of consecutive declines, reaching a significant resistance area, which should be watched very carefully.
This area stands between 93.60 an 93.85, which represents the same area that kept the index under pressure back in August.
As shown on the chart above, the index stalled right from 93.60’s until this report is released. In the meantime, the weekly close should be the key, as a weekly close above that area, would clear the way for a stronger retracement ahead, which may extend for weeks.
Otherwise, Traders should expect some selling pressure back to 93.0 and / or 92.50’s.
Why The Current Rally Might Not Last?
Despite the fact that the Federal Reserve decided to start reducing its 4.5 Trillion balance sheet, this is unlikely to change this year’s bearish trend for the US Dollar Index.
If we look at the size of the monthly reduction, its only 10B, to be increased to 50B in 12 months. This means that the Federal Reserve will be able to unwind its balance sheet by 30B this year and less than 300B next year.
But look at the ECB, the estimates are to taper the current QE by 20B in October, 20B in November and 20B in December, which equals 60B in 3 months, since the ECB will be faster when it comes to tapering, the US Dollar is unlikely to gain much more grounds anytime soon.
Key Fundamentals Ahead
During the US Session ahead, all eyes will be looking at the Final GDP, which is expected to remain unrevised at 3.0%, which would be the highest growth rate since Q3 of last year.
On the other hand, the initial jobless claims is expected to rise once again to 269K last week compared to 259K the week before, which would the first increase in two weeks,.
Moreover, the Goods Trade Balance is expected to decline slightly to 65.0B down from 65.1B, which would be the lowest in two months.
Will The Euro Return to 1.20?
As mentioned above, since the ECB is expected to taper the ongoing QE, the Euro bids are likely to come back before the next ECB decision.
From a technical point of view the Euro declined all the way back to 1.1727 yesterday and earlier this morning.
However, the pair managed to rebound right from that support area, which held back in August, which should be watched very carefully over the coming days.
So far, the solid support area stands between 1.1724 and 1.1663. As long as the Euro continues to trade within this area, the bullish outlook is here to stay, with a possibility to regain above 1.20.
Otherwise, a breakthrough that support, might trigger another leg lower, possibly toward 1.16 before the uptrend resumes.
Edited by:
Nour Eldeen Al-Hammoury
Market Analyst
