Dollar Index Reversal Top Indicates Potential Momentum Shift

The U.S. Dollar settled lower against a basket of major currencies on Friday after advancing over 100 for the first time in nearly two years. During the session, it rose as high as 100.20, its highest level since May 2020.

Despite forming a potentially bearish closing price reversal top, it still managed to finish up 1.3% for the week. The dollar index was primarily supported throughout the week by a jump in U.S. Treasury yields and a weaker Euro.

On Friday, the June U.S. Dollar Index settled at 99.753, down 0.007 or -0.01%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) finished at $26.68, up $0.01 or +0.02%.

The U.S. Treasury 10-year yield hit a three-year high above 2.7% on Friday, helped by the prospect of more aggressive Federal Reserve tightening. Additionally, this week’s release of minutes from the Fed’s March meeting showed “many” officials were prepared to raise rates in 50-basis-point increments in coming months.

In other news, the Euro was pressured by a tightening election race in France, the Euro Zone’s second-biggest economy, between President Emmanuel Macron and far-right candidate Marine Le Pen. Macron is still ahead in polls.

 

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. However, Friday’s closing price reversal top indicates momentum may be getting ready to shift to the downside.

A trade through 99.745 will confirm the closing price reversal top. This could trigger the start of a 2-3 day correction. A move through 100.200 will negate the chart pattern and signal a resumption of the uptrend. The main trend will change to down on a move through 97.730.

The minor range is 97.730 to 100.200. Its 50% level or pivot at 98.965 is the nearest support level.

The major support is the long-term Fibonacci level at 98.200.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index early Monday is likely to be determined by trader reaction to 99.975.

Bearish Scenario

A sustained move under 99.975 will indicate the presence of sellers. Taking out 99.745 will confirm the closing price reversal top. If this creates enough downside momentum then look for the selling to possibly extend into the minor pivot at 98.965.

Bullish Scenario

A sustained move over 99.975 will signal the presence of buyers. The first upside target is 100.200.

Taking out 100.200 will negate the closing price reversal top and signal a resumption of the uptrend. If the buying is strong enough we could see an acceleration to the upside with the next major target 100.560 – 100.930.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Index Dragged Lower by Euro Rebound

The U.S. Dollar is trading lower against a basket of major currencies on Wednesday after testing its highest level in nearly two years earlier in the session. The early jump was fueled by more hawkish comments from a Federal Reserve official.

A surprise turnaround in the heavily-weighted Euro is the main reason for the reversal in the index. The single-currency fell earlier, hurt by the prospect of new Western sanctions on Russia.

At 13:44 GMT, June U.S. Dollar Index futures are trading 99.370, down 0.058 or -0.06%. The Invesco DB US Dollar Index Fund ETF (UUP) is at $26.59, down $0.01 or -0.04%.

Early Strength Fizzles

The early strength in the dollar index was carried over from Tuesday after Fed Governor Lael Brainard said she expects a combination of interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a “more neutral position” later this year, with further tightening to follow as needed.

A drop in the Euro was also supportive. The common currency hit its lowest level in nearly a month in response to proposed European Union sanctions would ban buying Russian coal and prevent Russian ships from entering EU ports, part of a ramp up of Western sanctions on Russia over its nearly six-week invasion of Ukraine.

The U.S. Dollar Index began to retreat from its intraday high as the Euro turned higher. The price action suggests the move is being fueled by profit-taking in the dollar and short-covering in the Euro ahead of the release of the Fed minutes at 18:00 GMT.

The Fed is expected to provide fresh details on its plans to reduce its bond holdings.

Traders are hoping the minutes show the Fed’s intentions at their May monetary policy meeting on whether the widely expected rate hike will be 25 basis points or 50 basis points.

The reaction to the Fed news could be muted, however, because the market may have already priced in the interest rate hikes.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through the intraday high at 99.740 will signal a resumption of the uptrend. A trade through 97.730 will change the main trend to down.

The minor range is 97.730 to 99.740. Its 50% level at 98.735 is the nearest support. The major support is the long-term Fibonacci level at 98.200. This level has to hold as support to sustain the long-term bias.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index into the close on Wednesday is likely to be determined by trader reaction to 99.430.

Bullish Scenario

A sustained move over 99.430 will indicate the presence of buyers. If this move generates enough upside momentum, then look for a retest of 99.740. This price is a potential trigger point for an acceleration to the upside with the next major target 100.560 to 100.930.

Bearish Scenario

A sustained move under 99.420 will signal the presence of sellers. If this creates enough downside momentum, then sellers could try to drive the index into the pivot at 98.735.

Side Notes

A close under 99.420 will form a potentially bearish closing price reversal top. If confirmed , we could see the start of a 2 to 3 day correction with 98.735 the minimum downside target.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Index Picking Up Strength Over 98.595 Pivot

The U.S. Dollar is trading flat against a basket of major currencies early Tuesday after finishing higher for a third straight session on Monday. The catalysts behind the market’s strength were evidence of civilian killings in north Ukraine and the prospect of increased sanctions on Russia, which drove investors to seek safety in the greenback.

At 02:35 GMT, June U.S. Dollar Index futures are trading 98.945, down 0.029 or -0.03%. On Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $26.46, up $0.12 or +0.44%.

The U.S. currency also continued to garner support from a strong March non-farm payrolls report released Friday that backed expectations for a hefty half a percentage point tightening by the Federal Reserve at next month’s meeting, according to Reuters.

Global outrage spread Monday over civilian killings in northern Ukraine, where a mass grave and tied bodies of people shot at close range were found in a town taken back from Russian forces. Russia though denied the accusations, Reuters reported.

The deaths in Bucha, outside Kyiv, are likely to galvanize the United States and Europe into additional sanctions against Moscow, possibly including some restrictions on the billions of dollars in energy that Europe still imports from Russia.

The Euro was the biggest influence on the U.S. Dollar Index. The common currency was under pressure due to worries about economic damage from the war in Ukraine.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 99.365 will signal a resumption of the uptrend. A move through 97.730 will change the main trend to down.

The minor range is 99.470 to 97.715. The market is currently trading on the strong side of its pivot at 98.595, making it support.

The main support is the long-term Fibonacci level at 98.200.

If the main trend changes to down then support will become a pair of 50% levels at 97.280 and 96.720.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index early Tuesday is likely to be determined by trader reaction to 98.595.

Bullish Scenario

A sustained move over 98.595 will indicate the presence of buyers. If this is able to generate enough upside momentum then look for an eventual test of the main top at 99.365. Taking out this level will signal a resumption of the uptrend with another main top at 99.470 the next target.

A move through 99.470 will reaffirm the uptrend and could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under 98.590 will signal the presence of sellers. This could trigger a break into the major Fib level at 98.200. This level is the last support before the main bottoms at 97.730 and 97.715.

For a look at all of today’s economic events, check out our economic calendar.

US Dollar Index Weakens as 98.200 Support Fails

June U.S. Dollar Index futures are trading lower on Wednesday, pressured by a stronger Euro as traders took a positive view on peace talks in Ukraine. Also weighing on the greenback was a stronger Japanese Yen. The Yen is recovering from a seven-year low amid speculation government and central bank officials were uncomfortable with its recent plunge.

At 12:18 GMT, the June U.S. Dollar Index is trading 97.905, down 0.536 or -0.54%. On Tuesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $26.32, down $0.17 or -0.64%.

In economic news, the ADP Non-Farm Employment Change report showed the private sector added 455K new jobs in March as expected. This is down from the last month’s 486K reading.

Later today at 12:30 GMT, traders will get the opportunity to react to the latest U.S. Final GDP figures. They are expected to show the economy grew 7.0% last quarter.

The current price action indicates investors are trading off the potential peace in Ukraine that should reduce some of the burden on the Euro Zone economy, making the Euro a more attractive asset. Furthermore, the promise of peace is encouraging investors to change their minds about the dollar’s safe-haven attractiveness.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower. A trade through 97.715 will change the main trend to down. A move through 99.365 will signal a resumption of the uptrend.

The minor trend is down. This is controlling the momentum. It turned down on Tuesday when sellers took out 98.420.

The June U.S. Dollar index is also trading on the weak side of a long-term Fibonacci level at 98.200 and a pivot at 98.595, making both levels potential resistance.

If the main trend changes to down then look for the selling to possibly extend into a pair of 50% levels at 97.280 and 96.720.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar index on Wednesday is likely to be determined by trader reaction to the long-term Fibonacci level at 98.200.

Bearish Scenario

A sustained move under 98.200 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to extend into the main bottom at 97.715.

Taking out 97.715 will change the main trend to down. This could trigger a further break into the 50% level at 97.280.

Bullish Scenario

A sustained move over 98.200 will signal the return of sellers. This could trigger a surge into 98.595. Overtaking this level will make 99.365 the next target.

For a look at all of today’s economic events, check out our economic calendar.

US Dollar Index Weakens Despite Monday’s Trend Change

The U.S. Dollar Index is inching lower on Tuesday, capped by a rise in the Euro and a slight improvement in the Japanese Yen.

The single currency is edging higher in cautious trading as Ukrainian and Russian negotiators prepared to meet in Turkey for the first direct talks in more than two weeks.

Meanwhile, Japanese Yen bears are taking a breather after the currency crashed to its lowest level since August 2015 on Monday. The Yen on Tuesday kept up its relentless quest to defend a key yield cap by offering to buy unlimited amounts of 10-year government bonds, putting even more downward pressure on the Yen.

At 09:09 GMT, the June U.S. Dollar Index is trading 99.025, down $0.030 or -0.03%. On Tuesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $26.49, up $0.08 or +0.30%.

U.S. Dollar Index traders are also monitoring the action in the U.S. Treasury market after the 5-year and 30-year rates inverted on Monday morning for the first time since 2006, with more purchases of the longer-dated Treasurys than the shorter-dated government bonds.

U.S. 5-year and 30-year Treasury yields remained inverted on Tuesday morning, ahead of key employment data releases.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. The main trend turned up on Monday when buyers took out the previous main top at 99.300. The next main top target is 99.470. A trade through 97.715 will change the main trend to down.

The minor trend is also up. A trade through 98.420 will change the minor trend to down. This will shift momentum to the downside.

The minor range is 99.470 to 97.715. Its 50% level at 98.590 is support. The long-term support is the major Fibonacci level at 98.200.

Daily Swing Chart Technical Forecast

Now that the main trend has changed to up, we’d like to continue to see a pattern of higher-highs and higher-lows to drive the uptrend. Based on this assessment, the direction of the June U.S. Dollar Index on Tuesday is likely to be determined by trader reaction to 99.365.

Bullish Scenario

A sustained move over 99.365 will indicate the presence of buyers. If this move creates enough upside momentum then look for a surge into the next main top at 99.470.

Taking out 99.470 will reaffirm the uptrend. Since the next major target is 100.560 to 100.930, Taking out 99.470 could trigger an acceleration to the upside.

Bearish Scenario

The inability to overcome 99.365 will signal the presence of sellers. Taking out Monday’s low at 98.820 will indicate the selling pressure is getting stronger. This could trigger a break into the pivot at 98.590, followed by the minor bottom at 98.420.

Taking out 98.420 will change the minor trend to down. This will shift momentum to the downside with 98.200 the next target.

For a look at all of today’s economic events, check out our economic calendar.

Momentum Shift Puts US Dollar in Position to Resume Uptrend

The U.S. Dollar edged higher against a basket of currencies for a fourth session on Friday, as crude prices reversed earlier weakness and added to pressure for the Federal Reserve to be aggressive in combating inflation.

The greenback posted a solid gain for the week, which marked its sixth weekly gain in the past seven. The dollar has benefited from its status as a safe haven and the conflict in Ukraine has driven expectations the Fed will hike interest rates.

On Friday, June U.S. Dollar Index futures settled at 98.822, up 0.022 or +0.02%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) closed at $26.42, up $0.02 or +0.06%.

Helping to fuel a late session rally by the index was a surge in U.S. Treasury yields. The 10-year U.S. Treasury yield hit a fresh two-year high Friday as investors anticipate a more aggressive Fed. The 10-year rate at its highs of Friday’s session hit 2.503%, its highest level since May 2019. The yield started the week near 2.15%.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 99.300 will change the main trend to up. A move through 97.715 will signal a resumption of the downtrend.

The minor trend is also down. A trade through 98.965 will change the minor trend to up. This will shift momentum to the upside.

The minor range is 99.470 to 97.715. The index settled on the strong side of its pivot at 98.595, making it support.

The next support is the major Fibonacci level at 98.200. A close below this level will be a sign of weakness.

Short-Term Outlook

Look for an upside bias as long as the index holds above the long-term Fibonacci level at 98.200. A sustained move over 98.595 will indicate the buying is getting stronger. If this creates enough upside momentum then look for momentum to shift to the upside on a move through 98.965.

The main trend will change to up on a trade through 99.300. The trend will be reaffirmed if buyers can take out 99.470. This is also the trigger point for an acceleration to the upside.

A downside bias will develop on a sustained move under 98.200. If this creates enough downside momentum then look for the selling to possibly extend into the main bottom at 97.715.

Taking out 97.715 will reaffirm the downtrend. This could lead to a test of minor pivot at 97.280. A failure at this level will lead to a test of the major 50% level at 96.720.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Index Strengthens Over 98.595, Weakens Under 98.200

The U.S. Dollar trading nearly flat against a basket of major currencies late in the session on Friday after recovering from an early session setback. The greenback’s rebound is likely being fueled by a sharp rise in U.S. Treasury yields.

The 10-year U.S. Treasury yield hit a fresh two-year high Friday as investors anticipate a more aggressive Fed. The 10-year rate at its highs of Friday’s session hit 2.503%, its highest level since May 2019. The yield started the week near 2.15%

At 17:21 GMT, June U.S. Dollar Index futures are trading 98.820, up 0.020 or +0.02%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is at $26.41, up $0.01 or +0.04%.

Soaring rates come amid growing expectations the Federal Reserve will be more aggressive in its tightening cycle.

Fed Chair Jerome Powell on Monday said, “inflation is much too high,” and emphasized the Fed would continue to raise interest rates until inflation is under control.

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in a speech to the National Association for Business Economics.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 99.300 will change the main trend to up. A move through 99.470 will reaffirm the change in trend. A trade through 97.715 will signal a resumption of the downtrend.

The minor range is 99.470 to 97.715. The index is currently trading on the strong side of its pivot at 98.595, making it support.

The major support is the long-term Fibonacci level at 98.200.

Short-Term Outlook

Holding above the pivot at 98.200 will indicate the presence of buyers. If this move creates enough upside momentum then look for a trade through the minor top at 98.965. This could lead to a test of the two main tops at 99.300 and 99.470.

The main top is the key level to overcome. The chart pattern suggests 99.470 is the potential trigger point for an acceleration to the upside with a resistance cluster at 100.560 – 100.930 the next major target.

On the downside, the long-term Fibonacci level at 98.200 has to hold to sustain the current momentum. If it fails, the index could revisit 97.250 – 96.750.

For a look at all of today’s economic events, check out our economic calendar.

US Dollar Index: Strong Over 98.595, Weak Under 98.200

The U.S. Dollar is trading slightly better at the mid-session on Wednesday as investors monitored U.S. President Joe Biden’s first foreign trip since the war in Ukraine began on February 24. Investors are also dealing with a surge in crude oil prices, while continuing to assess hawkish remarks from Federal Reserve Chair Jerome Powell.

At 17:15 GMT, June U.S. Dollar Index futures are trading 98.650, up 0.127 or +0.13%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is at $26.38, up $0.04 or +0.15%.

The greenback is firm against the major currencies including the Euro as oil prices saw a more than 4% jump. Meanwhile, Biden is poised to announce, alongside other European leaders, new sanctions against Russia during his trip to Europe.

Higher yields continue to underpin the U.S. Dollar with the benchmark 10-year Treasury note rising to more than 2.4%. Federal Reserve Chair Jerome Powell helped fuel this recent surge in yields on Monday when he raised the possibility of raising interest rates by more than 25 basis points at upcoming meetings, a more aggressive stance echoed by other policymakers.

In related news, analysts at Jefferies on Wednesday updated its Fed forecast in light of Powell’s comments and now sees a 50 basis point hike at both the May and June meetings, followed by 25 basis point hikes at the remaining meetings of 2022.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 99.300 will change the main trend to up, while taking out 99.470 will reaffirm the uptrend. A move through 97.715 will reaffirm the current downtrend.

The minor range is 99.470 to 97.785. The index is currently straddling its pivot at 98.595.

The major support is the long-term Fibonacci level at 98.200.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index into the close on Wednesday is likely to be determined by trader reaction to 98.595.

Bullish Scenario

A sustained move over 98.595 will indicate the presence of buyers. Taking out the intraday high at 98.895 will indicate the buying is getting stronger. If this creates enough upside momentum then look for the rally to possibly extend into the main tops at 99.300 and 99.470.

Buyers are going to have to clear 99.300 in order to verify the change in trend, and possibly trigger an acceleration to the upside.

Bearish Scenario

A sustained move under 98.590 will signal the presence of sellers. This could trigger a fast break into the Fibonacci level at 98.200. Trading below this level will put the index in a position to challenge the main bottom at 97.715.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Index Strengthens Over 98.595, Weakens Under 98.200

The U.S. Dollar is edging higher against a basket of major currencies early Tuesday, following through to the upside after a strong performance the previous session. The catalysts behind the price surge are comments from U.S. Federal Reserve Chair Jerome Powell that opened the door for central bank policymakers to take a more aggressive monetary policy path.

At 03:31 GMT, June U.S. Dollar Index futures are trading 98.635, up 0.136 or +0.14%. On Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $26.34, up $0.09 or +0.34%.

While Powell’s comments are being identified as the catalysts, it was the jump in U.S. Treasury yields that made the U.S. Dollar a more attractive asset. The yield on the benchmark 10-year Treasury note rose 15.4 basis points to 2.302% after Federal Reserve chief Jerome Powell warned about rampant inflation.

Powell on Monday promised to take tough action on inflation, which he said jeopardizes an otherwise strong economic recovery. Powell also noted rate hikes could go from the traditional quarter-percentage-point moves to more aggressive half-basis-point increases if necessary.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 99.300 will change the main trend to up. A move through 97.715 will signal a resumption of the downtrend.

The first minor range is 99.47 to 97.715. The index is currently straddling its pivot at 98.595.

The main retracement zone support is 98.200 to 96.720. Inside this area is another pivot at 97.280. The market is trading on the strong side of this levels, making them support.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index on Tuesday is likely to be determined by trader reaction to the pivot at 98.595.

Bullish Scenario

A sustained move over 98.595 will indicate the presence of buyers. If this move generates enough upside momentum then look for a surge into the main top at 99.300. Taking out this level will indicate the buying is getting stronger with another main top at 99.470 the next target.

A trade through 99.470 could trigger an acceleration to the upside with a long-term resistance cluster at 100.560 to 100.930 the next major target area.

Bearish Scenario

A sustained move under 98.590 will signal the presence of sellers. The first target is the long-term Fibonacci level at 98.200. Crossing to the weak side of this level could trigger a further break into the main bottom at 97.715.

A failure to hold 97.715 will indicate the trend is weakening. This could trigger further breaks into 50% levels at 97.280 and 96.720.

For a look at all of today’s economic events, check out our economic calendar.

US Dollar’s Long-Term Uptrend Solid as Long as 98.200 Holds

The U.S. Dollar Index recovered after falling on Tuesday as volatile oil prices impacted the Euro and markets grappled with the significance of talks between Russia and Ukraine and indications that COVID lockdowns will crimp economic growth in China.

The two-sided price action by the dollar against a basket of currencies was also fueled by position-squaring ahead of Wednesday’s U.S. Federal Reserve interest rate and monetary policy decisions.

On Tuesday, June U.S. Dollar Index futures settled at 99.025, up 0.001 or 0.00%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) finished at $26.47, down $0.03 or -0.13%.

Crude oil futures were down sharply after concerns over supply were eased by ongoing Ukraine ceasefire talks and as rising COVID-19 cases in China suggested slower economic growth and less demand for oil.

On Wednesday, the Fed is expected to raise its benchmark interest rate 25-basis points, but traders want to see if policymakers give hints to how quickly it will raise rates again and how many times before the end of the year.

Daily June U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 99.470 will reaffirm the uptrend. A move through 97.785 will change the main trend to down.

The minor range is 99.470 to 97.785. The index closed on the strong side of its pivot at 98.625, making it support.

The market also closed on the strong side of a major retracement zone at 98.200 to 96.720. This support zone is controlling the longer-term direction of the index.

Short-Term Outlook

The direction of the June U.S. Dollar Index on Wednesday is likely to be determined by trader reaction to the pivot at 98.625.

The longer-term direction is being controlled by the Fibonacci level at 98.200. This is the last potential support level before the 97.785 main bottom.

A sustained move over 98.200 could create the upside momentum needed to retest 99.470. This price is a potential trigger point for an acceleration to the upside with 100.560 – 100.930 the next major target area.

A change in trend to down could trigger a further break into the major 50% level at 96.720. Buyers are likely to return on a test of this level. But if it fails, the dollar rally could be in trouble.

For a look at all of today’s economic events, check out our economic calendar.

US Dollar Index Facing Resistance at 95.755 – 96.020

The U.S. Dollar is trading lower against a basket of major currencies on Friday after putting in a mixed performance earlier in the session. Nonetheless, the greenback is poised to post its best weekly performance in a month, as the world’s reserve currency held its ground amid a sell-off of riskier assets across markets.

At 12:13 GMT, March U.S. Dollar Index futures are trading 95.685, down 0.40 or -0.04%. On Thursday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $25.68, up $0.08 or +0.31%.

Investor sentiment has soured in recent days due to weaker economic data, rampant inflation and concerns over the pace of U.S. Federal Reserve policy tightening.

With risk currencies like the Australian and New Zealand Dollars moving lower and safe-haven currencies like the Swiss Franc and Japanese Yen edging higher, the U.S. Dollar is likely being underpinned by flight-to-safety buyers.

Treasury yields are also falling, which is further indicative of safe-haven buying. Most of the time the dollar tracks yields, but when investors are looking for protection from risk, you can throw out the usual correlations.

Daily March U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart, however, momentum has been trending higher since the formation of the closing price reversal bottom on January 14.

A trade through 96.475 will change the main trend to up. A move through 94.610 will negate the closing price reversal bottom and signal a resumption of the downtrend.

The minor trend is also down. A trade through 95.405 will reaffirm this trend.

The main range is 93.200 to 96.895. Its retracement zone at 95.050 to 94.610 is support. This area stopped the selling at 94.610 on January 14.

The short-term range is 96.895 to 94.610. The index is currently testing its retracement zone at 95.755 to 96.020. This area is resistance.

Short-Term Outlook

The direction of the March U.S. Dollar Index on Friday is likely to be determined by trader reaction to 95.755.

Bearish Scenario

A sustained move under 95.755 will indicate the presence of sellers. The first downside target is the minor bottom at 95.405.

Taking out 95.405 could trigger a further break into the main retracement zone at 95.050 to 94.610.

Bullish Scenario

A sustained move over 95.755 will signal the presence of buyers. Taking out 95.850 could trigger a surge into 96.020.

Overtaking the short-term Fibonacci level at 96.020 could trigger an acceleration to the upside with 96.475 the next major target.

Side Notes

Essentially, bullish counter-trend buyers are trying to form a secondary higher bottom at 95.050 to 94.610. Bearish trend traders are trying to form another secondary lower top at 95.755 to 96.020.

For a look at all of today’s economic events, check out our economic calendar.

Omicron Spread to Adversely Impact Dollar Strength and UUP, Temporarily Benefiting UDN

There is some uncertainty as to the U.S. Dollar (USD) performance against a basket of major currencies as from December, with, on the one hand, traders retreating from riskier currencies amid talk of interest rate hikes by central bankers, and concerns about the spread of Omicron cases on the other.

Looking at the one-year performance, the Invesco DB U.S. Dollar Index Bullish ETF (UUP) which track the U.S. dollar up against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc is up by 6.26% while the inverse-tracking Invesco DB U.S. Dollar Index Bearish ETF (UDN) is down by minus 7.54%.

https://static.seekingalpha.com/uploads/2022/1/3/49663886-16412694855759788.png

Source: Trading View

Now, if you are a Forex trader and have reasons to think that the U.S. dollar is going to fall, you can buy UDN, but it could also be beneficial to those looking to mitigate currency risk or protect against the possibility to be negatively impacted by variation in exchange rates between currencies. One example is a European company whose base currency is the euro with a U.S.-based business accounted in USD.

Thus, the company is susceptible to the fluctuations of the EUR/USD currency pair. Here, there is transactional currency risk corresponding to the possibility that the equivalent value of an invoice issued by a company is adversely affected by a change in the exchange rate. Then, there are also balance sheet risks whereby the assets or liabilities are adversely affected.

To address these risks, instead of using some complex and costly hedging strategy in the derivatives market making use of forward contracts or swap mechanisms, UUP and UDN, both carrying management fees of 0.75% can prove handy. Still, these instruments represent a cost for the company (or an individual trader) and it is important to find the right balance between full coverage and no coverage.

Coming back to the thesis, with a hawkish Fed planning interest rates hikes in 2022 and beyond, and the U.S. economy looking strong while the European Central Bank (ECB) taking longer to tighten monetary policy are positives for the USD. However, with the risks associated with Covid, especially the Omicron strain lessening (due to more infection rates not necessarily resulting in more hospitalization or death), there is less appeal for the USD as a safe-haven currency.

Thus, making a parallel with Dec 2019 to March 2020 when UUP gained more than 3% (brown curve below) as the number of Covid cases escalated and the WHO declared it to be a worldwide pandemic, the opposite should be the case in Q1 with the spread of Omicron making the dollar lose some of its luster in 2022.

https://static.seekingalpha.com/uploads/2022/1/3/49663886-164126948561408.png

Source: Trading View

Consequently, an investment in UDN, with the potential of gaining 3% makes sense, but bear in mind that its rise will be temporary, as learning from the past, the dollar should continue to prevail.

For this matter, the dollar started gaining as from October 2014 with the period before characterized by the U.S. actively carrying out quantitative easing (QE), which massively increased the quantity of money in circulation, in turn limiting the appreciation of its currency. This all changed from September 2014 when the ECB, in turn, resorted to QE (after initially prioritizing on long-term bank refinancing), resulting in a fall of the euro. For its, part the Fed ended up asset purchases in October 2014. These two events resulted in a strong dollar from this month (labeled in the chart above), with UUP rising and conversely, UDN falling.

This trend should continue as the dollar remains central to the Forex market as a trade currency. Alternatives like the euro or even commodity currencies like the Canadian Dollar remain strong but as regional currencies. Exploring further, Bitcoin still have to broaden their use as a medium of exchange in addition to a store of value before being in a position to rival the USD.

 

U.S. Dollar Index (DX) Futures Technical Analysis – Next Move Hinges Upon Reaction to 96.355 – 96.200

The U.S. Dollar climbed against a basket of major currencies on Friday as traders retreated from riskier currencies amid talk of interest rate hikes by central bankers and concerns about the spread of Omicron cases.

The index was under pressure for a second session early Friday before making a dramatic rebound in the afternoon. The intraday reversal helped the index recoup all of the value it had lost on Thursday following a series of central bank policy statements.

On Friday, March U.S. Dollar Index futures settled at 96.548, up 0.533 or +0.55%. The Invesco DB US Dollar Index Bullish Fund finished at $25.91, up $0.18 or +0.70%.

Index components, the Euro and British Pound fell 0.6% and 0.5% respectively, after having booked gains the two previous days. Commodity-linked currencies, including the Australian and Canadian Dollars, also lost value as crude oil prices fell 2% on worries that Omicron variant will dampen demand. The dollar was flat against the Japanese Yen.

Daily March U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower. A trade through 96.895 will negate the closing price reversal top and signal a resumption of the uptrend. A move through 95.500 will change the main trend to down.

The minor trend is down. A trade through 95.810 will change the minor trend to down. This will confirm the shift in momentum.

The minor range is 96.895 to 95.810. The index is trading on the strong side of its pivot at 96.355, making it support.

The short-term range is 95.500 to 96.895. Its 50% level at 96.200 is additional support.

The intermediate range is 93.810 to 96.895. If the main trend changes to down then its pivot at 95.360 will become the first target.

The main range is 93.200 to 96.895. Its retracement zone at 95.050 to 94.610 is the primary downside target. This zone is controlling the longer-term direction of the index.

Short-Term Outlook

The short-term direction is being controlled by the pivots at 96.355 and 96.200.

Look for the upside bias to continue on a sustained move over 96.355 and for a downside bias to develop on a sustained move under 96.200.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Dollar Index (DX) Futures Technical Analysis – Main Trend Up, but Momentum Trending Lower

The U.S. Dollar is under pressure against a basket of currencies on Thursday after the Euro and British Pound jumped after the European Central Bank said it would continue to cut its bond purchases, while the Bank of England became the first major central bank to raise interest rates since the beginning of the pandemic.

At 15:03 GMT, March U.S. Dollar Index futures are trading 95.920, down 0.562 or -0.58%. The Invesco DB US Dollar Index Bullish Fund is at $25.73, down $0.12 or -0.45%.

The dollar was under pressure before the BoE and ECB announcements after posting a closing price reversal top the previous session. The selling began after the Fed announced on Wednesday it will end its pandemic-era bond buying in March and pave the way for an expected three interest rate hikes in 2022.

The Euro surged after the ECB said it will cut bond buys under its 1.85 trillion Euro Pandemic Emergency Purchase Programme and it will end the scheme as expected in March. It will, however, ramp up bond buying under the longer-running but more rigid Asset Purchase Programme (APP).

The Sterling popped higher after the BoE raised its main interest rate to 0.25% from an historic low of 0.1%.

Daily March U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum shifted to the downside earlier today when sellers confirmed yesterday’s closing price reversal top.

A trade through 96.895 will negate the closing price reversal top and signal a resumption of the uptrend. A move through 95.500 will change the main trend to down.

The short-term range is 95.500 to 96.895. The index is currently trading on the weak side of its pivot at 96.200, making it resistance.

The intermediate 50% level at 95.355 is the next downside target, followed by the main retracement zone at 95.050 to 94.610.

Daily Swing Chart Technical Forecast

The direction of the March U.S. Dollar Index into the close on Thursday will be determined by trader reaction to 96.200.

Bearish Scenario

A sustained move under 96.200 will indicate the presence of sellers. If this move continues to generate enough downside momentum then look for the selling to possibly extend into the main bottom at 95.500, followed by the 50% level at 95.355.

Bullish Scenario

A sustained move over 96.200 will signal the presence of buyers. This could trigger a quick rally into a minor pivot at 95.350. Sellers could come in on the first test of this level. Overcoming this level could drive the index into 96.895.

For a look at all of today’s economic events, check out our economic calendar.

USD/CAD: Loonie Remains Weak on Hopes of Hawkish U.S. Fed Views

The Canadian dollar weakened against its U.S. counterpart on Wednesday as investors remain cautious ahead of the Federal Reserve’s policy announcement on Wednesday, where it is widely expected to signal an earlier end to its asset purchases; weak crude oil prices also weighed on the commodity currency.

“The CAD is finding it hard to resist the broader push higher in the USD this morning even with the risk backdrop of stocks and commodities not especially negative. All indications are that the Bank’s 2% inflation target will be retained but the mandate will contain language which allows for policymakers to allow for changes in the labour market when setting policy,” noted Shaun Osborne, Chief FX Strategist at Scotiabank in its Dec 13 note.

“We note that Canadian short-term yields have edged lower in the past couple of sessions, compressing spreads somewhat and weighing on the CAD, as markets await details of the Bank’s new mandate—although we doubt the new framework will materially alter near-term rate prospects.”

Today, the USD/CAD pair rose to 1.2834 up from Monday’s close of 1.2804. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

“Against its peers (AUD and NZD), also likely to weigh on CAD is Canada’s deteriorating terms of trade in 2022 on a bearish outlook for oil vs a more positive outlook for industrial metals (AUD) and dairy (NZD). Citi forecasts $50-60/bbl Brent in 6-12mths,” noted analysts at Citi.

Investors looked forward to the Federal Reserve’s key meeting later this week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.11% lower at 96.213.

On Wednesday, the Fed will likely announce an acceleration of its bond-buying program. Fed’s decision may also be influenced by consumer price inflation data, which hit nearly 40 years high in November.

“The concern at the Fed will be that high inflation today can fuel expectations of higher inflation tomorrow and the day after that and so on. This can then feed through into wage demands and in an environment of decent corporate pricing power we see those costs post onto customers,” noted James Knightley, Chief International Economist at ING.

“The Fed will be keen to avoid this (or be seen willing to tolerate it), hence our expectations for a faster taper…with the programme concluding in February. We also expect them to signal the prospect of two rate hikes in their “dot plot”, up from the one they currently have.”

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.31% higher at 25.83 on Monday.

“This week presents one of the final opportunities of the year for some significant moves in FX markets, as a whole host of developed and emerging market central banks hold meetings. So far, it has been a good year for the US dollar, the Canadian dollar and the Chinese renminbi. Expect these trends to largely continue – especially the strong US dollar,” noted Francesco Pesole, FX Strategist at ING.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by the first quarter of next year, largely due to the expectation of at least one rate hike in 2022. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Canada is the world’s fourth-largest exporter of oil, which edged lower as new coronavirus Omicron variant risks weigh. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 1.22% lower at $70.43 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

USD/CAD: Loonie Hits One-Week Low on Weak Oil Prices; Fed Policy Decision Eyed

The Canadian dollar hit its lowest level in one week against the U.S. counterpart in early trading on Monday as weak crude oil prices weighed on the commodity currency; investors also prepared for the Federal Reserve’s policy announcement on Wednesday, where it is widely expected to signal an earlier end to its asset purchases.

“The CAD has given back some of its strong, early-week gains following the BoC policy decision amid some consolidation in oil prices below $75 as well as renewed concerns regarding the Omicron variant that has weighed on risk sentiment. Note our correlation studies show the CAD’s linkage to both energy and stocks has strengthened (last) week,” noted Shaun Osborne, Chief FX Strategist at Scotiabank in its Dec 10 note.

“We continue to forecast USDCAD rising to 1.20 through H2 2022 even if the sort of CAD strength we had been expecting into year-end is out of reach now.  We think the CAD could still rally modestly but perhaps no more than 1.25 ahead of New Year. Note that our valuation model has reflected some of the recent slippages in the CAD but still indicates a modest CAD undervaluation relative to spot levels near 1.27. We expect USDCAD gains to the 1.27/1.28 range to continue to draw USD selling interest as a result.”

Today, the USD/CAD pair rose to 1.2765 up from Friday’s close of 1.272. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

Investors looked forward to the Federal Reserve’s key meeting later this week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.23% higher at 96.318.

On Wednesday, the Fed will likely announce an acceleration of its bond-buying program. Fed’s decision may also be influenced by consumer price inflation data, which hit nearly 40 years high in November.

“The concern at the Fed will be that high inflation today can fuel expectations of higher inflation tomorrow and the day after that and so on. This can then feed through into wage demands and in an environment of decent corporate pricing power we see those costs post onto customers,” noted James Knightley, Chief International Economist at ING.

“The Fed will be keen to avoid this (or be seen willing to tolerate it), hence our expectations for a faster taper…with the programme concluding in February. We also expect them to signal the prospect of two rate hikes in their “dot plot”, up from the one they currently have.”

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.15% lower at 25.75 on Friday.

“This week presents one of the final opportunities of the year for some significant moves in FX markets, as a whole host of developed and emerging market central banks hold meetings. So far, it has been a good year for the US dollar, the Canadian dollar and the Chinese renminbi. Expect these trends to largely continue – especially the strong US dollar,” noted Francesco Pesole, FX Strategist at ING.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by the first quarter of next year, largely due to the expectation of at least one rate hike in 2022. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Canada is the world’s fourth-largest exporter of oil, which edged lower as new coronavirus Omicron variant risks weigh. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.63% lower at $71.21 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

U.S. Dollar Index (DX) Futures Technical Analysis – Strengthens Over 96.235, Weakens Under 93.230

The U.S. Dollar is edging higher against a basket of major currencies on Friday as traders prepared for U.S. inflation figures scheduled later in the day that could cement the course of interest rate hikes next year.

The dollar index is headed for its seventh consecutive weekly rise ahead of the data, which is due at 13:30 GMT. If U.S. inflation hits Reuters poll expectations of 6.8% then it would be the highest since 1982, and any upside surprise will be interpreted as a case for a faster Fed taper and rate hikes.

At 12:50 GMT, December U.S. Dollar Index futures are trading 96.360, up 0.108 or +0.11%. On Thursday, the Invesco DB US Dollar Index Bullish Fund (UUP) ETF settled at $25.79, up $0.09 or +0.35%.

U.S. consumer confidence data is also due on Friday, and if it holds up could portend more price pressures ahead.

Daily December U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 96.940 will signal a resumption of the uptrend. A move through 93.865 will change the main trend to down.

The minor trend is also up. A trade through 95.525 will change the minor trend to down. This will also shift momentum. A move through 96.655 will indicate the buying is getting stronger.

The minor range is 95.525 to 96.940. The index is currently trading on the strong side of its pivot at 96.235, making it support.

On the upside, the first target is a major long-term 50% level at 96.500. This is a potential trigger point for an acceleration to the upside.

On the downside, the first support is a minor pivot at 95.955. This is a potential trigger point for an acceleration into 95.405, followed by the short-term retracement zone at 95.105 to 94.670.

Daily Swing Chart Technical Forecast

The direction of the December U.S. Dollar Index on Friday is likely to be determined by trader reaction to 96.235.

Bullish Scenario

A sustained move over 96.235 will indicate the presence of buyers. The first upside target is 96.500, followed by 96.590 and 96.655.

The high at 96.655 is a potential trigger point for an acceleration into 96.940. This is also a trigger point for an acceleration with 97.120 the next like target.

Bearish Scenario

A sustained move under 96.230 will signal the presence of sellers. The first target is 95.955, followed by 95.840.

Taking out 95.840 could trigger an acceleration into 95.540, followed by 95.525 and 94.405.

For a look at all of today’s economic events, check out our economic calendar.

USD/CAD: Loonie Snaps Two-Day Losing Streak Ahead of U.S. Inflation Data

The Canadian dollar snapped its two-day losing streak against its U.S. counterpart in early trading on Friday ahead of the U.S. inflation data, which could cement a rate hike course in 2022; recovery in energy prices also supported the commodity currency.

“Though the Bank of Canada dropped the transitory inflation language and warned of broadening price pressures, overall, the central bank was less hawkish than the market expected. Rates remained on hold and the central bank talked of an economy that still required considerable support. This resulted in some Canadian Dollar underperformance despite gains against the Buck,” noted analysts at LMAX.

“Finally signs of a major bottom in the works after a severe decline from the 2020 high. A recent weekly close back above 1.2500 encourages the constructive outlook and opens the door for a push back towards next critical resistance in the 1.3000 area. Any setbacks should be well supported into the 1.2200s.”

Today, the USD/CAD pair fell to 1.2691 down from Thursday’s close of 1.2713. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

Canada is the world’s fourth-largest exporter of oil, which edged higher on improved sentiment as fears over the Omicron variant eased worldwide. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.97% higher at $71.63 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

As traders awaited U.S. inflation data later in the day, the greenback held its ground. Prices are expected to rise 6.8% annually and any upside surprise may lead to a faster Fed taper and rate hike.

Also, investors looked forward to the Federal Reserve’s key meeting next week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.10% higher at 96.365. Next week, the Fed will likely announce an acceleration of its bond-buying program. Fed’s decision may also be influenced by consumer price inflation data due Friday.

“Market moves have been detached from data inputs since last Friday’s NFP, but we should see fresh focus on the US inflation story today as November CPI numbers are released. There is likely some room for the dollar to rally further if the headline rate breaks above 7%, while we see quite contained downside risk for the greenback in case of a moderately below consensus read,” noted Francesco Pesole, FX Strategist at ING.

“That’s because inflation would need to drop quite sharply before the market can reasonably price out the Fed tightening cycle in 2022. We still expect the dollar to remain generally supported into next week’s Fed meeting.”

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.35% higher at 25.79 on Thursday.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of at least one rate hike next year. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

U.S. Dollar Index (DX) Futures Technical Analysis – Strengthens Over 96.655, Weakens Under 95.840

The U.S. Dollar is trading flat against a basket of major currencies early Friday as traders await the release of key U.S. inflation data later in the session.

On Thursday, the dollar edged higher against the majors as a warning from the International Monetary Fund’s (IMF) chief economist added to concerns about Omicron and tempered the appetite for currencies and other assets considered “risky.”

At 14:47 GMT, December U.S. Dollar Index futures are trading 96.185, down 0.067 or -0.07%. On Thursday, the Invesco DB US Dollar Index Bullish Fund (UUP) ETF settled at $25.79, up $0.09 or +0.35%.

The index is in a position to post its seventh consecutive weekly rise ahead of the CPI report, which is due at 13:30 GMT. Annual price gains of 6.8% are expected and any upside surprise will likely be interpreted as a case for a faster Federal Reserve taper and sooner interest rate rises.

Consumer confidence data is also due on Friday and if it holds up could portend even more price pressures ahead.

Daily December U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 96.940 will signal a resumption of the uptrend. A move through 93.865 will change the main trend to down.

The minor trend is also up. A trade through 95.525 will change the minor trend to down. This will shift momentum to the downside.

The first minor range is 95.525 to 96.940. The index is currently straddling its pivot at 96.235.

On the upside, the nearest resistance is a long-term 50% level at 96.500.

On the downside, the nearest support is a minor pivot at 95.955.

Additional support is a short-term 50% level at 95.405. The main support zone is 95.105 to 94.670.

Daily Swing Chart Technical Forecast

The direction of the December U.S. Dollar Index on Friday is likely to be determined by trader reaction to 96.235.

Bullish Scenario

A sustained move over 96.235 will indicate the presence of buyers. This could trigger a move into the pivot at 96.500, followed by a high at 96.655. The latter is a potential trigger point for an acceleration to the upside with the next major target the main top at 96.940.

The main top at 96.940 is another potential trigger point for a near-term rally into the long-term main top at 97.120.

Bearish Scenario

A sustained move under 96.235 will signal the presence of sellers. The first downside target is 95.955, followed by 95.840. The latter is a potential trigger point for an acceleration to the downside with 95.540, 95.525 and 94.405 the next potential targets.

For a look at all of today’s economic events, check out our economic calendar.

USD/CAD: Loonie Weakens as BoC Shuns Hawkish Shift, Weak Crude Oil Prices Hurt

The Canadian dollar weakened against its U.S. counterpart in early trading on Thursday after the Bank of Canada disappointed some currency traders who had hoped for a more hawkish stance; weak energy prices also weighed on the commodity currency.

As expected, the BoC kept its monetary policy unchanged and maintained its prediction that the first hike may occur in April next year. Nevertheless, currency traders were on alert for a more hawkish shift from the central bank following strong inflation, employment, and GDP growth.

“The Canadian dollar was trading marginally weaker after the rate announcement, but the impact is proving very contained and short-lived given the lack of surprises in the statement. Some of the recent CAD strength is likely being fuelled by the notion that the BoC is ready to respond to inflation pressures with tightening, assuming the global picture does not significantly worsen,” noted Francesco Pesole, FX Strategist at ING.

“We think…statement did very little to dent this notion, allowing CAD to continue benefiting from the rebound in global sentiment. We think USD/CAD may extend its decline to 1.2500 by the end of the year, although that is heavily reliant on further improvements in the Omicron-related sentiment.”

Today, the USD/CAD pair rose to 1.2689 up from Wednesday’s close of 1.2651. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

Canada is the world’s fourth-largest exporter of oil, which edged lower on Omicron and inflation worries. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.58% lower at $72.76 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

The greenback gained as investors looked forward to the Federal Reserve’s key meeting next week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.27% higher at 96.150. Next week, the Fed will likely announce an acceleration of its bond-buying program. Fed’s decision may also be influenced by consumer price inflation data due Friday.

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.45% lower at 25.70 on Wednesday.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of at least one rate hike next year. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.