This article was written exclusively for Investing.com
The Dollar Index has been consolidating its recent gains around the mid-point of the 2020-2021 drop over the past few weeks or so. Today, there is a possibility for a breakout as investors await the last consumer inflation print of the year ahead of the Federal Reserve’s rate decision next week.
CPI is expected to have risen to 6.8% year-on-year in November or 4.9% y/y on the core front, from 6.2% and 4.6% respectively in October.
A hotter-than-expected set of numbers should see the greenback rally strongly as it would cement expectations that the Fed will wrap up its bond purchases in the next couple of months, before raising interest rates in the first half of 2022.
With the Fed likely to speed up the pace of taper, while most other major central banks are relatively less hawkish—not least the ECB and BOJ—this should keep the Dollar Index’s uptrend intact for a little longer at least.
As such, I am expecting to see a bullish breakout from this triangle consolidation pattern in the coming days:
If the dollar does break out from this continuation pattern, then, as a minimum, it is likely to rise towards the 61.8% Fibonacci retracement against the entire move down from the 2020 peak, at 97.73.
Zooming out, we can see that the dollar index is in fact also bang in the middle of its 6-year range:
As per the weekly chart, the fact that we have broken and stayed above the prior pivotal level of 94.65 is a long-term bullish development. Thus, even if we see some short-term weakness here and there, the longer-term technical picture will remain bullish.
Therefore, I wouldn’t be surprised if we now see a move towards the upper end of the 6-year range, with the 100.00 level being the main objective on this time frame, especially given how the DXY has failed to hold above here on multiple occasions.
Another thing to notice from the weekly chart is how the dollar index has had a tendency to form a major low or high at the start (or in the first quarter) of every year in the last 6. As we are coming to the end of another year, be wary to look out for potential topping formations in the coming months.
Although the dollar looks quite bullish right now, backed by a Fed ready to speed up tapering, it is possible we could see foreign currencies start showing more life in the coming months as the likes of the Bank of England and possibly even the European Central Bank respond to rising price pressures in Europe.
What’s more, the US economy could slow down relatively faster than the Eurozone, after its relative outperformance since the stimulus-driven recovery from the height of the pandemic. With taxes likely to rise and monetary policy tightened somewhat, there is the possibility that the dollar may soon top out.
But until it does, short-term focused traders should continue to trade in the direction of the existing trend. For now, buying dips in the dollar continues to be the dominant trend. With more and more people buying the dollar, we could see a sharp continuation in the bullish momentum in the coming weeks—especially if today’s US inflation data surprises to the upside again and/or the Fed decides to speed up the tapering process next week.