The US dollar pulled back after being boosted by safety buying earlier in the week amid concerns that the upcoming fiscal stimulus won't be as big as previously hoped. Meanwhile, brokers in US saw riskier currencies like the Australian dollar rebound as the dollar fell.
Wells Fargo macro strategist Erik Nelson told Reuters that there's a "tug of war right now between the longer-term momentum... and the shorter-term phenomenon of maybe a dollar squeeze." The dollar rebounded from its lowest level in three years earlier this month, and forex brokers in the USA see the decline as running too far too fast.
Dollar works on inverse head-and-shoulders pattern
The dollar index, which weighs the greenback against a basket of currencies, has increased 0.5% this month after a more than 6% decline in 2020. The dollar also benefited this week as investors rebalanced their portfolios for the month's end. CIBC Capital's Bipan Rai told Reuters that the market is "still pretty short dollars" and has been driven by portfolio rebalancing this week.
According to DailyFX, the dollar index is working on an inverse head-and-shoulders pattern that could put the March trendline in focus if the neckline at 90.92 is broken. If that level is broken, the next area of resistance would be 91.74, which was the September low. However, if the head-and-shoulders pattern doesn't break the neckline and break toward 90.05 instead, it signals a possible downward continuation pattern, which could carry the dollar index to 88.27, the 2018 low.
FXStreet reports that if the dollar index closes higher than the neckline at 90.92, it would confirm a breakout or a trend change from bearish to bullish. It could also mean a rally toward 92.63 or higher for the index. However, if the index closes below the low on the right shoulder at 90.045, it would be bearish for the dollar.
The dollar versus gold
According to FXStreet, 91 is the key level to watch for the dollar index. It serves as a line of resistance, as the weekly top on Dec. 21 sits there, as does the current 2021 high. The 55-day simple moving average is at 90.78, which reinforces 91 as the area to watch. It seems likely that the negative view of the greenback will continue as long as the index trades below the 200-day simple moving average at 94.08.
Thursday's pullback in the dollar is offering some upside for gold, although it continues to consolidate around $1,850 an ounce. The Federal Reserve didn't change much for the markets at its meeting on Wednesday. According to Craig Erlam of OANDA, the central bank "reinforced its commitment to low interest rates and bond purchases and offered a slightly more downbeat assessment of the economy in the near-term, which allowed 10-year Treasury yields to ease back towards 1%."
Erlam noted that the dollar index has so far failed to break above 91, which would have been bad news for gold. A breakout from current levels should determine the near-term prospects of the yellow metal. He sees support for the dollar index at around 90.
