This article was written exclusively for Investing.com
The US dollar has strengthened materially in recent months as interest rates have soared in the US, and the Fed has signaled rate hikes. The dollar’s advance has stalled more recently and could be facing a trend reversal in the weeks ahead as the euro gains strength.
The technical chart shows a very ominous reversal pattern, known as a triple top, and while it is not set in stone, the risk is that the decline in the dollar may only be starting as it also faces a long-term uptrend that began nearly a year ago.
The Dollar’s Technical Weakness Driven By The Euro
The recent reversal in the dollar index is due to the rise in rates across Europe as investors now begin to price in the risk of the ECB starting to raise rates this year. This has led to a significant rebound in the euro vs. the dollar, pushing that currency up to around 1.11 to the dollar from about 1.08 at the beginning of March.
This caused the dollar index to find extreme technical resistance around 99.25 and support around 97.75 which left it to trade in a range since the beginning of March. However, should the dollar index break below 97.75, it will likely result in a much bigger drop, especially against the euro.
It could result in the dollar index falling to another level of support, around 96.30, which would challenge the long-term uptrend that goes back more than a year. This would present significant issues for the dollar because a break of that uptrend would signal a further decline in the index.
The Fed’s Hand
It would be a huge blow, especially for the Fed and its fight to tame inflation. A weakening dollar would put upward pressure on the prices of commodities, making them more expensive. Considering how minor the stronger dollar’s effects have been on the cost of commodities like oil and copper, a weakening dollar would likely worsen the whole situation.
Still, a big hint for the future direction is likely to come on Apr. 6, when the FOMC minutes from the March meeting are released. Those minutes are likely to give investors a look at just how hawkish the Fed may be going forward and its potential plans to reduce its balance sheet. These minutes will provide the market with the clues and information needed to decide if the dollar will fall lower.
However, if the Fed should prove to be more hawkish than previously viewed, it could send the dollar index even higher. Because the triple top pattern cannot be confirmed until support at 97.75 breaks. Should the dollar index strengthen and rise above resistance at 99.25, it will head back to March 2020 levels above 100.
The next few days are likely to prove crucial for the dollar index and could be costly should the dollar see a significant plunge. This couldn’t come at a worse time as the Fed may lose one of the greatest tools in its fight against inflation at precisely the wrong moment.