US Dollar Fourth Quarter Projection: Breakout in the Making

As we head into the fourth quarter of this year, the US Currency has officially broken free of the trend of return volatility that had held firm during the first nine months of this year. Entering into 2021, the US Dollar was already engulfed in an intense sell-off that had lasted for the better part of the previous year’s last nine months. The Dollar found support at a critical point on the chart in January, drawn from across the 90-handle in the Dollar index, and after beginning to rebound early this year.

However, that motif fell flat in Q2 and for most of the third quarter, till the Fed started to prepare for a possible transition away from the ultra-loose financial policies that have characterized their strategy since the Coronavirus outbreak entered the picture last March, at which point the motif began to gain traction. Beginning at the close of the third quarter, the US Dollar started to form an ascending triangular shape, and that breach occurred this week when price movement broke out of the triangular structure. Is it possible for this to continue? Will bullish USD traders continue to bid the Greenback higher through the close of the year?

Dollar Index Analysis

The Dollar stays on the defensive but has so far managed to stay above the 94.00 level as measured by the US Dollar Index (DXY). The better risk mentality, combined with weak movement in US yields and some margin calls, weighs on the Dollar and forces the index to recede to the 94.00 area by week’s end. Indeed, dip purchasers appear to have reappeared to the troubled risk group on Friday, sponsoring the Greenback’s corrective rise after reaching the overbought area.

US rates’ steady position remains unsupportive of additional Dollar appreciation, as yields on the key US 10-year reference note were unable to gain much upside momentum. On the economic calendar, the most well-watched ISM Manufacturing index increased to 61.1 in September. Continuing in the manufacturing industry, Markit’s PMI came in above expectations at 60.7. Additionally, the official Consumer Sentiment Index, as evaluated by the University of Michigan, increased to 72.8, and Michigan’s 5-Year Inflation Expectations increased to 3%.

Key Levels of The US Dollar Index

DXY CHART.Source:  Tradingview.com

Currently, the index is down 0.14 percent at 94.10, and a break over 94.43 (2021 peak Sep.29) will open it up to 94.74 (monthly peak Sep.25, 2020) and afterward 95.00. A breach below 94.10 will open the door to 95.00. (round level). On the other hand, the next downward resistance level appears at 93.72 (weekly peak on August 20), followed by 92.82 (55-day simple moving average), and lastly 91.94. (monthly Sep.3).