Dollar Holding Grounds Ahead Of Fed Policy Meeting

Dollar index was able secure grounds above its 96.00 levels against major peers on Monday amid ongoing optimism towards a potential accelerated asset purchase tapering by the Fed during its policy meeting this Wednesday.

Dollar has been trading within a tight range after climbing to its July 2020 highs in late November, constrained within its 95.80 ~ 96.40 levels. The thin trading across the currencies market was due to lack of confirmation, as the global economy continues to be threatened by the latest Covid-19 variant, the Omicron, while major central banks are expected to provide insight on future monetary policies later this week.

Dollar’s rally in November was supported by rising US inflation levels, which boosted optimism for an earlier rate hike by the Fed to prevent goods prices from soaring too high. Fed members reiterated that a more rapid reduction in overall asset purchases must first be conducted to provide leeway for potential rate hikes earlier. However, latest uncertainties surrounding the Omicron variant could potential derail the Fed’s policy plan.

Stronger preference towards the dollar was also contributed by a set of dovish policy stance from other major central banks such as the European Central Bank (ECB). ECB President, Christine Lagarde, reiterated that the underlying Covid-19 risks continue to threaten the EU’s economy, and that loose monetary policy must be extended for a longer period of time to ensure sufficient support towards the bloc’s economy.

Should the Fed meets market expectations in delivering its policy stance ahead, an extension of rally in the dollar market can be expected, keeping riskier currencies such as the euro and the pound pressured in a longer-term downtrend.

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From the technical front, the EURUSD in its D1 time-frame continues to be pressured by its downward trendline. The pair has been withstanding above its crucial support zone near 1.1200, however, failing to break higher from its resistance zone near 1.1350. Investors can consider a potential side-way trading strategy between the 1.1350 resistance and 1.1200 support level, whereas a breakout below the support level would suggests further bearish pressure in the medium-term.