Dollar Pressure Extended; Market Requires Further Catalyst

The dollar index (DXY) was gaining initially Wednesday, before an extended sell-off pressure during late US trading session that sent the dollar below its 96 levels. The DXY recorded losses up to 0.28% against a basket of major currencies to 95.86.    

Market signals remain mixed entering into the new years, after recent studies showed that individuals contracted with the Omicron variant only showed mild symptoms despite a higher transmission rate. Increasing evidence helped to calm market fears over the potential jeopardize of the global economic recovery amid the recent resurgence in global new infections.

The dollar was previously demanded higher after nations such as London and Australia reinstated lockdown measures to curb the Omicron spread. However, as the market fears diminish, risk appetite was boosted as investors enter into riskier energy and stock market.

Limiting dollar’s losses were ongoing optimism towards a potential rate hike by the Fed, which could take place as early as March next year after completely ending its bond buying program. Should the US inflationary levels continue to surge above the bank’s expectations, the Fed might be forced to accelerate its policy tightening sooner to prevent goods prices from soaring too high.

While trading this week is expected to experience low volatility ahead of the New Year, investors will wait for further market clues from next week’s US jobs report to gauge the dollar’s movement ahead. 

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From the technical front, dollar index in its H4 timeframe continues to consolidate within a side-way channel between the 96.80 resistance and 95.80 support level. With lack of market driver this week, dollar is expected to resume its trading within the channel. MACD, showing a positive divergence signal, suggests the dollar to rebound from the bottom-level of its channel. A breakout below the channel could send the dollar back towards its longer-term upward trendline near the 94.90 support level.