Dollar extends Fed inspired rally

The dollar has made decent progress this week. It has gained ground most notably against the euro, causing the EUR/USD pair to fall to below 1.18 today. The GBP/USD’s sharp rally has also stalled when it couldn’t move north of 1.36 last week, despite ongoing weakness in the EUR/GBP cross. Commodity dollars have all weakened versus the US dollar. The latter’s performance has been less stellar against perceived safe haven Japanese yen, Swiss franc and gold. That’s because of ongoing geopolitical concerns and retreating US technology stocks amid valuation concerns.

The dollar’s gains reflect the view that bond yields in the US will rise as the Fed withdraws monetary support by normalising interest rates and reducing its huge balance sheet. Low yielding currencies and those where the central bank is still dovish is where the dollar’s gains are likely to shine against the most, for example the Swiss franc and Japanese yen – except during times when markets are in “risk off” mode. But with technology stocks heading lower recently amid valuation concerns and as global yields rise – owing to the fact key central banks are turning hawkish – the wider stock markets could be on the verge of a correction. Thus, the dollar’s potential strength could be amplified against risk-sensitive currencies such as the Australian and New Zealand dollars, instead.

Meanwhile in the very short-term outlook, the dollar’s next move could be determined by upcoming data releases from the US, including CB Consumer Confidence and New Home Sales, and a speech by the Federal Reserve Chairwoman Janet Yellen later on this afternoon. Overall, these events are unlikely to cause a dollar sell-off, as the sentiment is now turning positive once again on the US currency.

For now, the Dollar Index is at its highest point on the week, having already risen slightly in each of the past two weeks. At 93.00, it is now testing the lower band of a key short-term resistance range between 93.00 and 93.35. This area was previously support and resistance, while both the 50-day moving average and a bearish trend line also cut through here. A sustained break above here would create the first “higher high”, with the DXY having already created a couple of higher lows since it formed that false breakout reversal pattern beneath the 2016 low of 91.92. So, we are potentially on the verge of a bullish reversal confirmation for the dollar. Things can only get interesting should this happen.