Dollar index paused the recent rally. Will it rebound again?

The dollar index stalled its recent gaining stick. Currency retreated from a 10-month high against its major counterparts today.

The dollar turned negative yesterday following the release of weaker than expected U.S. GDP and Aug pending home sales numbers. Adding to this, a dovish comment from Chicago Fed President Goolsbee, who warned that policymakers were at risk of raising interest rates too much also added some pressure.

 In addition, strength in the yen reduced demand for the dollar. The comments from Japanese Finance Minister Suzuki sparked speculation Japan was close to intervening in the currency market to support the yen.

U.S. economic GDP remained unchanged at 2.1% (annualized q/q), expectation was at 2.2%. Also, Aug pending home sales dropped by -7.1% m/m, forecast was at -1.1% m/m. That was the biggest decline in 11 months. Conversely, weekly initial unemployment claims rose by 204k, showing a stronger labor market than expectations of 214k.

Now focus will shift on a personal consumption expenditure reading- the Fed’s preferred inflation gauge, due to release later today. The data will decide whether the central bank had enough impetus to carry out its hawkish outlook.

The bank had warned last week that sticky inflation was likely to elicit one more rate hike this year, and fewer rate cuts in 2024. Such a scenario bodes poorly for Asian currencies.

However, a partial government shutdown is looming, which could affect the release of economic data.

Technical Outlook

 Dollar index stalled its recent rally and retreated by 0.34% today, trading at 105.7560 compared to previous day’s close of 106.1260. it touched a 10-month high of 106.8390 on Wednesday.

 The recent price action formed a dark cloud cover candlestick, which is a trend reversal pattern. The currency already retreated by 0.84% from the recent high. It’s trading at a short-term moving average. Hence, for further correction the dollar index would need to trade below 105.5525 in order to test 104.8090-104.2550.

On the upside, massive resistance is seen at 106.8395 and a break above only, dollar index could witness a new rally towards 107.2560-107.8750.

 Overall trend will depend on today’s PCE numbers. But, technical aspects are indicating weakness for a short time.