U.S. Dollar Index (DX) Futures Technical Analysis – Rangebound as Oversold Conditions Underpin Prices

The U.S. Dollar is inching higher against a basket of currencies for a second straight session while posting an extremely tight trading range on relatively low volume. The price action reflects similar movement in U.S. Treasury bonds.

It also suggests that last week’s steep plunge in yields and the U.S. Dollar may have been an over-reaction to the latest U.S. consumer inflation report that showed price pressures were easing.

This notion was somewhat supported by comments from a pair of Fed members who emphasized the central bank still has work to do in taming inflation and that additional rate hikes were coming. They advised investors to focus on the endpoint rather than the size of each individual rate hike.

At 05:34 GMT, December U.S. Dollar Index futures are trading 106.810, up 0.279 or +0.26%. On Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.77, up $0.12 or +0.42%.

Oversold or Taking a Breather Before the Next Round of Selling Pressure?

Technical traders may be looking at the index as oversold after it tumbled 3.9% last week, its worst performance since March 2020, after U.S. consumer prices rose less than expected, stoking speculation a peak in rates might be close.

Bearish traders may be watching the money markets that are currently pricing in an 89% probability that the Federal Open Market Committee will slow the pace of hikes to a half a point at its next meeting on Dec. 14, against 11% odds for another 75 basis point increase. This suggests the index may have more room to break.

Nonetheless, the Fed has spoken, reminding traders that there is still a lot of work to be done to bring inflation under control. This may be enough to generate a near-term short-covering rally and retracement of last week’s break.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 106.140 will signal a resumption of the downtrend. A move through 110.890 will change the main trend to up.

The nearest resistance is a long-term Fibonacci level at 107.780. The main range is 104.150 to 114.745. The index is currently trading on the weak side of its retracement zone at 108.197 to 109.448, making it resistance.

Daily Swing Chart Technical Forecast

Trader reaction to 106.645 is likely to determine the direction of the December U.S. Dollar Index on Tuesday.

Bullish Scenario

A sustained move over 106.645 will indicate the presence of buyers. If this move creates enough upside momentum then look for a surge into a pair of Fib levels at 107.780 and 108.197. Since the main trend is down, look for sellers on a test of this area.

Bearish Scenario

A sustained move under 106.645 will signal the presence of sellers. This could lead to a retest of 106.140. Taking out this level could trigger an acceleration to the downside with 104.150 the next likely target.