Lack of bullish momentum caps upside of US dollar index

THE US dollar index’s rally eased this month following the recent release of September’s Federal Open Market Committee meeting minutes and less hawkish remarks made by Fed officials.

The minutes showed increased concern about the risks associated with rate hikes, though members agree that there is still work to be done with key measures of inflation remaining well above their target.

Several Fed officials also reiterated their stance that US interest rates are near their peak. They noted that the jump in US Treasury yields contributed to the Fed’s tightening measures. As a result, they emphasised a cautious approach when considering any further increases in the benchmark of the Fed funds rate.

Additionally, the greenback was unable to gather momentum from both September’s Retail Sales and Industrial Production figures, which came in higher than expected. This could signal limited upside for the US dollar index in the near term.

Looking from a technical perspective, the US dollar index remains stalled in a choppy trade environment. This comes after the recent upside was capped at the 107.3 resistance level, which is confluent with the resistance of an uptrend channel.

This level also represented a retest of the 50 per cent Fibonacci retracement, derived by using the swing high of 114.7 in September last year and the swing low of 99.5 formed in July 2023. With the price currently trading outside of the uptrend channel, a near-term continuation of the rally looks challenging, especially with a lack of momentum.

The Moving Average Convergence Divergence (MACD) indicator confirmed the pullback in momentum with a bearish crossover recently. This is further supported by the Relative Strength Index (RSI) indicator demonstrating a retracement from overbought territory and the formation of a bearish divergence when US dollar index made its recent highs.

That being said, the bears will have to gather additional momentum to make a significant downward move below the 20-day simple moving average (SMA) and immediate 105.6 support level.

This support level has acted as a key swing high resistance in January and March last year. At present, the US dollar index could remain within a range and its potential upside could be capped by the lack of bullish momentum currently.

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The writer is a research analyst at Phillip Securities