Dollar index takes bull breather after invalidating 7-month bearish trendline
- The dollar index has pulled back slightly from overnight highs.
- The upside breakout of the seven-month falling trendline is still valid.
- The yield curve steepening may continue to draw bids for the dollar.
The dollar index (DXY), which tracks the greenback's value against majors, is currently trading in a sideways manner around 93.85.
On Thursday, the DXY rose by 0.59% to 94.10, the highest since Sept. 30, breaching the trendline falling from March 23 and May 18 lows.
The bid tone around the greenback strengthened after the European Central Bank kept rates steady but hinted at a possible boost to its emergency bond-buying program in December to contain the fallout from the coronavirus.
However, the break above 94.00 was short-lived, as stock markets stabilized, weakening the haven demand of the greenback after the US data showed the economy expanded by a record 33.1% in the third quarter of 2020, marking a V-shaped recovery from the sharp virus-induced contraction of the second quarter.
That said, the path of least resistance is still on the higher side. That's because the upside break of the falling trendline confirmed Thursday remains valid despite the pullback from 94.10 to 93.85. Besides, the futures tied to the S&P 500 are signaling risk aversion with a 0.74% drop. As such, a re-test and break above Thursday's high of 94.10 cannot be ruled out.
Further, the upbeat growth data could accelerate the steepening of the yield curve, lending additional support for the US dollar. As represented by the spread between the 10- and two-year yields, the curve has already steepened by nearly 30 basis points over the past three months.
Technical Levels