The dollar continues to surge on increasing expectations that the Fed will maintain its higher interest rate stance for an extended period
The dollar index extended its strong rally on Monday, following a 0.8% advance on Friday and starting the week with a higher gap opening.
Upbeat May NFP numbers on Friday reinforced the hawkish stance, indicating that the Fed may maintain its higher-for-longer rate policy, which boosted bullish sentiment and lifted the greenback sharply.
Markets are now focused on Wednesday’s release of the US May CPI (with the year-over-year figure expected to remain unchanged at 3.4%) and the subsequent policy decision at the end of the FOMC’s two-day meeting. The key point of interest will be the Fed’s ‘dot plots’ projections for the path of interest rates.
The Fed’s latest projection, released in March, indicated expectations for three 25-basis point rate cuts by the end of the year. The main question is how much the Fed will revise down its previous projection.
A more hawkish tone from US policymakers on Wednesday would further support the greenback.
The fresh bullish acceleration from Friday’s multi-week low (103.61) has already retraced almost 61.8% of the larger 106.36/103.61 downtrend, turning the technical picture on the daily chart bullish and shifting the near-term focus to the upside.
A break above the top of the thick daily Ichimoku cloud (105.18) generated a bullish signal (which requires confirmation by a daily close above the cloud) and added to the improved technical picture (14-day momentum turned positive, and moving averages shifted to a bullish setup).
Additionally, a bear-trap on the weekly chart (bull-trendline / 20WMA) supports the near-term action.
A violation of the 61.8% Fibonacci pivot (105.31) would further strengthen the bullish structure and open the way towards targets at 105.71/106.00 (76.4% Fibonacci retracement / round figure).
Corrective dips are likely to be limited, ideally contained by the broken 55DMA at 104.88 and not exceeding trendline support at 104.61, to keep the bulls in play.
Res: 105.31; 105.62; 105.71; 106.00
Sup: 105.18; 104.98; 104.61; 104.46
