While the US dollar (DXY) came under selling pressure on Monday, the weakness proved unsustainable, as the pair rebounded well off the lows of the session and is higher in today’s trading, currently holding near 101.48, up 0.32% over Monday’s close.
Monday’s setback reinforced first support at the November 22nd low at 100.65. Yesterday’s low, by comparison, was at 100.64. Continuing to hold this level would keep the near term bias in the dollar firmly to the upside.
The current high in the dollar stands at 102.05, which represents a test of the next level of resistance at the 102-102.15 zone. Given the test of resistance and current overbought condition, a period of consolidation or correction could remain underway over the near term despite the recent intraday recovery rally.
Should dollar strength remain prevalent, resulting in a breakout to new rally highs, the next target becomes 103.50. Longer term, the target for the dollar is at the 108-109 area. This target is derived from the recent breakout from a multi-month consolidation phase, as can be seen on the monthly chart.
The dollar is expected to maintain a firm tone on an intermediate term basis, give the high probability of an interest rate increase at the December FOMC meeting and the prospects for higher inflation during the Donald Trump administration. The minutes from the November FOMC were released last Wednesday and, overall, still indicate a very strong commitment by the majority of FOMC members to increase rates at the December meeting.
At present, fed fund futures are pricing in a 98.2% probability of an interest rate increase at the December meeting, up from 93.5% at the end of last week’s trading. With dollar strength expected to remain a dominant theme amid the currency markets, subsequent setbacks in the dollar are expected to remain limited.
However, volatility has the potential to increase later in the week, given the release of nonfarm payrolls for November on Friday. This figure will be particularly important given the expectations for a rate hike in December. Consensus estimate is for an increase of 180K jobs. A much weaker-than-expected number could call into question the potential for a December rate hike, a development that would likely hit the dollar hard, at least on a short term basis.
Other data releases next week in the US include the second estimate of Q3 GDP today. Economists expect the figure to be revised up to 3.0% from the first reading of 2.9%. Also in today’s trading, November consumer confidence is on the calendar. This month, expectations are for a reading of 100, up from 98.6 in October.
On Wednesday, the ADP employment report for November is expected to show an increase of 160K jobs, from 147K last month, while Chicago PMI is forecast to rise to 51.8 from 50.6. Pending home sales and the Fed’s Beige Book are also due out on Wednesday. Then on Thursday, initial jobless claims are on the calendar, as is the ISM manufacturing survey. Economists expected the figure to rise slightly to 52.0 from 51.9 in October.