DXY: US dollar index forms W pattern amid Fed taper talk

The US dollar index (DXY) popped as the risk-off sentiment returned and after the relatively hawkish FOMC minutes published on Wednesday. The index rose to $93.45, which was the highest level since November.

Risk-off sentiment

The DXY index has been in a relatively strong bullish trend in the past few weeks as the number of Covid cases has jumped globally. The upward trend accelerated this week after New Zealand moved into level 4 lockdown.

The announcement from New Zealand sent shockwaves around the world because the country has had no cases in the past six months. The country has also been in lockdown, with most of its borders being closed. 

Therefore, there are concerns that the world will see more Covid cases and potential lockdowns in the near term. The US dollar index tends to do well in such periods because of the so-called risk-off sentiment. It happens when investors move from risky assets to the safety of the US dollar.

The US dollar index also rallied after the Federal Reserve released minutes of the last meeting. In this meeting, the members decided to leave interest rates unchanged at zero and maintain its asset purchases program.

The minutes showed that more members of the FOMC were starting to talk about tapering of asset purchases. The only caveat was that the tapering should only happen if data from the US economy continues strengthening. 

These minutes were in line with what some Fed members have said recently. Last week, Fed members like Raphael Bostic, Richard Clarida, and Mary Daly said that the bank should start winding down its program.

The only difference among some of the members is when. Some support tapering by the end of the year while others support doing so by mid-2022.

US dollar index technical analysis

The daily chart shows that the DXY index has formed a W pattern. The current level is along the upper side of this pattern. At the same time, it has moved above the 25-day and 50-day weighted moving averages (WMA) while the MACD is above the neutral level.

Therefore, a bullish breakout will be validated if the price manages to move above the resistance at $93.35. If this happens, the next key resistance level will be at $94.50, which is about 1% above the current level.