Dollar Index Dragged Lower by Euro Rebound

The U.S. Dollar is trading lower against a basket of major currencies on Wednesday after testing its highest level in nearly two years earlier in the session. The early jump was fueled by more hawkish comments from a Federal Reserve official.

A surprise turnaround in the heavily-weighted Euro is the main reason for the reversal in the index. The single-currency fell earlier, hurt by the prospect of new Western sanctions on Russia.

At 13:44 GMT, June U.S. Dollar Index futures are trading 99.370, down 0.058 or -0.06%. The Invesco DB US Dollar Index Fund ETF (UUP) is at $26.59, down $0.01 or -0.04%.

Early Strength Fizzles

The early strength in the dollar index was carried over from Tuesday after Fed Governor Lael Brainard said she expects a combination of interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a “more neutral position” later this year, with further tightening to follow as needed.

A drop in the Euro was also supportive. The common currency hit its lowest level in nearly a month in response to proposed European Union sanctions would ban buying Russian coal and prevent Russian ships from entering EU ports, part of a ramp up of Western sanctions on Russia over its nearly six-week invasion of Ukraine.

The U.S. Dollar Index began to retreat from its intraday high as the Euro turned higher. The price action suggests the move is being fueled by profit-taking in the dollar and short-covering in the Euro ahead of the release of the Fed minutes at 18:00 GMT.

The Fed is expected to provide fresh details on its plans to reduce its bond holdings.

Traders are hoping the minutes show the Fed’s intentions at their May monetary policy meeting on whether the widely expected rate hike will be 25 basis points or 50 basis points.

The reaction to the Fed news could be muted, however, because the market may have already priced in the interest rate hikes.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through the intraday high at 99.740 will signal a resumption of the uptrend. A trade through 97.730 will change the main trend to down.

The minor range is 97.730 to 99.740. Its 50% level at 98.735 is the nearest support. The major support is the long-term Fibonacci level at 98.200. This level has to hold as support to sustain the long-term bias.

Daily Swing Chart Technical Forecast

The direction of the June U.S. Dollar Index into the close on Wednesday is likely to be determined by trader reaction to 99.430.

Bullish Scenario

A sustained move over 99.430 will indicate the presence of buyers. If this move generates enough upside momentum, then look for a retest of 99.740. This price is a potential trigger point for an acceleration to the upside with the next major target 100.560 to 100.930.

Bearish Scenario

A sustained move under 99.420 will signal the presence of sellers. If this creates enough downside momentum, then sellers could try to drive the index into the pivot at 98.735.

Side Notes

A close under 99.420 will form a potentially bearish closing price reversal top. If confirmed , we could see the start of a 2 to 3 day correction with 98.735 the minimum downside target.