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US Dollar loses momentum ahead of 94, sticks to modest daily gains

  • DXY extends consolidation in the upper half of 93-94 range.
  • US T-bond yields fuels a recovery in the NA session.
  • Volatility is likely to remain low until the FOMC releases minutes on Wednesday.

After starting the day with a bullish gap, the US Dollar Index, which tracks the greenback against a basket of six trade-weighted peers, erased its gains to turn negative near the mid-93s but gained traction in the second half of the day and advanced towards the 94 mark. However, the index failed to preserve its bullish momentum amid a lack of fundamental catalysts that could support this move and went into a consolidation phase. At the moment, the index is at 93.90, up 0.3% on the day.

The next major catalyst for the greenback could be the headlines surrounding the tax legislation voting in the U.S. Senate. However, with the Thanksgiving break coming up this Thursday, the tax reform discussion is likely to continue next week. In the meantime, investors are going to be waiting for the FOMC to release the minutes from its November meeting on Wednesday. Although the FOMC's statement is unlikely to impact the expectations of a December rate hike, any clues surrounding the policy outlook in 2018 could receive some reaction from the markets.

Analysts at BBH argue that investors may be underestimating the extent of Fed tightening in 2018, and further elaborate, "this is not because of the balance sheet effects, but because we expect the Fed to raise rates two or three times in 2018, while the market has a little more than one discounted.  A Reuters survey found that most economists it surveyed expect the Fed to hike rates twice next year, which is somewhere in between what the market is discounting and what the Fed's forecasts suggest.”

Technical levels to consider

In case the index makes a decisive break above 94 (psychological level), it could aim for 93.65 (Nov. 14 high) ahead 95.00/05 (psychological level/Oct. 27 high/Nov. 7 high). On the downside, supports align at 93.50 (daily low), 93 (psychological level/Oct. 20 low) and 92.30 (Sep. 26 low). 

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