The US dollar index dipped below support at 100.18 in the Asian session but buyer’s stepped in at the European open slightly ahead of the psychological 100.00 level to lift the pair back above the horizontal level.
The 100.18 level in DXY is considered significant as it held price action lower in 2015 on two separate attempts. The first rejection resulted in a decline towards the 93.00 handle and the second triggered a drop to the 92.00 handle.
Downside momentum in the dollar index came following last week’s Fed meeting as the combination of a priced in rate increase and a less hawkish than expected central bank triggered a broad-based dollar decline.
The index briefly traded at the lowest level since February 8th today as the Fed meeting continued to weigh. There are several Fed members speaking this week which will tend to impact the near-term directional bias for the dollar.
While the Fed will want to remain data dependent, there may be an attempt to adjust market expectations following last week’s decline. The central bank has not shifted from its forecast for three rate hikes this year and will want to ensure market expectations remain at appropriate levels to allow further normalization while limiting market volatility.
Technical traders have been watching a head and shoulders pattern develop in the index. Gains at the start of the month had threatened to invalidate the pattern as DXY pushed slightly above the left shoulder of the pattern. Last week’s decline has put the pattern back in focus and a sustained break of 100.18 would put a spotlight on the pattern.
The neckline of the pattern currently falls around 99.43 and in the event it is broken, measured move targets point to a drop to around the 95.00 handle.
The latest COT positioning report indicated that non-commercials had added to the aggregate US dollar net long ahead of the Fed meeting. There was a build of $1.5 billion in the week to March 14th to bring the net long to $18.1 billion. The position size was not at an extreme level as compared to positioning earlier this year and in late 2016 but nevertheless contributed to a squeeze to accelerate downside momentum last week.
The first level in focus to the upside will be Friday’s high of 100.47. A break of the level would be indicative of a broader recovery with the next level of interest at 100.74 as the level has been influential dating back to late November. Downside support remains at 100.18, a failure to hold above the level could result in a quick drop to the neckline of the head and shoulders pattern.
Fed Evans is the first to share his outlook and is scheduled to speak at 13:10 EST. President Trump is scheduled to speak after the Wall Street close today at 19:30 EST. Fed members Dudley, George and Mester will be speaking on Tuesday.