US dollar consolidates ahead of FOMC minutes

The US dollar index was weaker on Tuesday after having surged on Monday above the key 94.00 level. During the current period of fluctuation, the dollar index has thus far remained ensconced in a tight consolidation during this shortened Thanksgiving week in the U.S. While last week featured a pronounced drop for the dollar, the early part of the current week has seen the US currency vacillate in anticipation of key upcoming monetary and fiscal policy developments.

As US equities soared once again to new record highs on Tuesday, due in large part to a continuing series of strong earnings reports, markets were awaiting: a late afternoon speech by Fed Chair Janet Yellen, Wednesday’s release of minutes from the last FOMC meeting, and further details on the Republican tax reform plans.

With little in the way of major scheduled economic releases out of the US for the balance of this week and into next week (with the exception of Wednesday’s FOMC minutes and next week’s preliminary GDP reading), the dollar will likely take more of its cues from the progress of US fiscal policy, most notably tax reform, for the time being.

From a technical perspective, the dollar index, which tracks the US dollar against a basket of six other major currencies, is currently fluctuating around the key 94.00 level and entrenched between its 20-day moving average to the upside and 50-day moving average to the downside. The current consolidation is apt to be broken on any new revelations regarding US tax reform or from Wednesday’s FOMC minutes. With respect to the minutes, expectations for the likelihood of a December Fed rate hike continue to remain elevated well above 90%. Therefore, much of the rate hike anticipation is likely already priced-in, and any dovish indications to be found in the FOMC minutes on Wednesday could have a pronounced negative effect on the dollar.

The same may hold true for the long-awaited tax reform plan – since much of the positive anticipation has already been priced-in to the dollar, any major disappointments on the content or timing of the tax plan could have a significantly negative effect on the dollar index. Any breakdown below the current consolidation should target key downside support around 92.75, the area of the last major swing low in mid-October. To the upside, a consolidation breakout amid the FOMC minutes release or tax reform developments should target key resistance around 95.15, the level of the last major high earlier this month.