Dollar flexes its muscles…but for how long?

The dollar was king against a basket of major currencies on Tuesday, as investors shrugged off heightened fears about the U.S. budget deficit.

With the Greenback currently rebounding from three-year lows, could this be the start of an incredible rally or another dead cat bounce? There is a suspicion that the bull’s argument for the dollar to extend gains is likely based on optimism over stronger U.S. economic growth and rising inflation.

However, the prospect of other major central banks gradually tightening monetary policy could inspire bears to re-enter the scene. Price action continues to suggest that the dollar remains affected by a variety of key fundamental drivers, and it will be interesting to see where the currency concludes this month.

Much attention will be directed towards January’s FOMC meeting minutes, that is scheduled for release on Wednesday. With the probability of a Fed hike in March currently standing at 83.1%, according to CME’s FedWatch Tool, investors may closely scrutinize the minutes for fresh insights on rate hike timings beyond Q1. The Dollar could extend gains, if January’s meeting minutes are presented with a hawkish touch.

Taking a look at the technical picture, the Dollar Index breached above 89.50 during Tuesday’s trading session. A solid daily close above this level may invite an incline higher towards 90.00 and 90.55, respectively. Alternatively, a failure for prices to keep above 89.50 could encourage a decline back to 89.00.

Gold melts ahead of FOMC minutes

Gold found itself vulnerable to losses during Tuesday’s trading session, with prices dipping below $1340 as the Dollar appreciated.

With expectations heightened over the Federal Reserve raising U.S interest rates in March, Gold, which is zero-yielding, could be exposed to further pain. Bears may be injected with fresh inspiration to drag the price of Gold lower if the minutes from January’s FOMC meeting are hawkish. From a technical standpoint, the yellow metal is at risk of depreciating further, if prices fail to keep above $1340. Sustained weakness below $1340 could encourage a decline towards $1324.15. Alternatively, a breakout above $1340 may open a path back towards $1360.

Currency spotlight – GBP/USD

Sterling struggled to hold ground against a strengthening dollar on Tuesday, with the British pound/U.S. dollar (GBP/USD) currency pair dipping towards 1.3940 as of writing.

Price action suggests that pound bulls are tired, exhausted and in need of fresh inspiration to keep the GBPUSD afloat. The UK jobs report, scheduled for release on Wednesday, could offer Sterling some support if average earnings exceed market estimates. From a technical standpoint, the GBP/USD is vulnerable to further losses below the 1.4000 level. Sustained weakness under 1.4000 could spark a decline towards 1.3850. Alternatively, a daily close back above 1.4000 may inspire bulls to challenge 1.4100.

Bitcoin punches above $11,500

Bitcoin extended recent gains during Tuesday’s trading session, with prices punching above $11,500.

With the cryptocurrency securing a solid weekly close above the psychological $10,000 level, speculation may heighten over Bitcoin bulls re-entering the scene. Focusing purely on the technical perspective, much attention will be directed towards how prices behave around the $10,000 level this week. A failure for prices to keep above $10,000 could trigger further downside. If bulls are able to maintain control from current levels, prices could challenge $12,000.

About the Author

Lukman Otunuga is an FXTM research analyst