Avalanche of central bank meetings could hasten a dollar breakout
Three central banks, two tough decisions and a new Covid variant all add to the volatile mix this week. In fact, there are a multitude of meetings in the run-up to the holiday period, eight in the G20 which are all mostly “live”, though it’s a given what the most important one will probably do.
Wednesday’s FOMC meeting is set to increase the taper pace to pave the way for faster rate hikes.
All the focus will be on the “dot plot” with the expectation of at least two hikes next year. The more hawkish projections at the June meeting turned the bearish dollar trend around then. Many believe this will happen again and we see an upside breakout as policy divergence with a more patient ECB kicks in.
Money markets have already moved to price in a quicker taper and more aggressive tightening path from the Fed, but there could be some scope for positive or negative surprises this week. Several Wall Street analysts believe this could include more hawkish language that points to a quicker shift to tighter monetary conditions or a more aggressive move in the dot plot. On the flip side, consensus does seem very bullish, with the main presumption that the Fed looks through the uncertainties of the new Covid variant potentially ripe for a downside surprise.
DXY breakout looks imminent
On the weekly chart, the Dollar Index (DXY) looks to have formed a symmetrical triangle. This continuation pattern suggests that the price will continue to move in the same direction as it did prior. The long-term trend is bullish, having risen from the May lows at 89.52 in a series of higher highs and higher lows.
More recently, after making a cycle top at 96.94, the market pulled back as prices were overbought. Signals such as a daily RSI near 75 and the pair running along and above the upper Ketner band pointed to an imminent retracement.
The index has been consolidating above the midway point of the March 2020 high to the January 2021 low around 96.50. If we get a breakout in line with the long-term dominant trend, bulls will first target a push through 96.94. The June 2020 highs around 97.80 will come into view if we do get a breakout and range expansion after a few weeks of trading sideways. The bottom of the triangle and recent range should offer strong support at 95.51, below the 50% retracement level of 96.56.