The U.S. dollar (DXY) continues to hold in the consolidation phase, which developed following the sharp advance, which lifted the basket of currencies 2.8% throughout the first half of October. DXY is trading with a modest downside bias today, currently holding near the 97.82 level, down 0.06% from Tuesday’s N.Y. close.
On the 4-hour chart, the range has tightened, with a slight bias to the upside, given the rising trendline. As a result of the diminished volatility, Bollinger Bands are narrowing, suggesting a period of high volatility could develop over the near term. Narrowing Bollinger Bands typically lead to spikes in volatility.
At present, the broader bias remains to the upside, as the dollar appears to be merely working off the extreme overbought condition, which developed as a result of the October advance. The Stochastic remains at an elevated level. Thus, range-bound trading could continue to characterize price action throughout today.
Thus far, no important support levels have been breached as DXY has moved sideways. Near term support is defined by former resistance at the July rally highs at 97.57, which was tested and held with the lows established October 13th and 14th. This level also came into play Tuesday and held, as the dollar paired losses after the release of the CPI data.
All-items CPI was up 0.3% in September, in line with consensus, while the all-items index excluding food and energy was up 0.1%, slightly below estimates. However, the all-items index was up 1.5% year-over-year, the largest 12-month increase since October 2014. This is tracking the Federal Reserve’s long term inflation target of 2%. Overall, the data supports a rate hike before the end of the year. According to fed funds futures, the probabilities of an interest rate increase declined only slightly after the release of the data. Specifically, as of Tuesday’s close, Fed Fund futures were indicating a 65% chance of a rate increase at the December meeting, down from 69% on Monday.
Today, Housing Starts/Building Permits will be released at 8:30am EST, while Existing Home Sales are due out Thursday at 8:30am EST. In today’s trading, the Federal Reserve will also release its latest beige book, a review of regional economic conditions.
On breakout to the upside, the next level to watch is at the February reaction high at 98.58, followed by the January rally high at 99.83, which corresponds to the upper boundary of a rising trend channel that has developed on the weekly chart. The dollar remains overbought on both a daily and weekly basis. Thus, a resumption of the recent advance over the near term would be considered a sign of internal strength.
Should sellers step in, additional support levels below 97.57 are at Fibonacci retracement levels of the advance from the August low. A 38.2% retracement would push the dollar down to the 96.60 level. While such a development is not expected, a decline to this retracement would not alter the intermediate term bullish bias in DXY.