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The US dollar’s rally is showing signs of fatigue ahead of the Oct. 31-Nov.1 FOMC meeting. Markets are pricing in a 98% chance that the Fed will keep interest rates on hold after a number of Fed officials recently pointed out that the tightening in financial conditions as a result of the jump in yields has reduced the need for imminent tightening – a point echoed by Fed chair Powell last week. For more details, see “US Dollar Outlook After Powell: GBP/USD, AUD/USD, EUR/USD Price Action,” published October 20.

Meanwhile, technical charts suggest that the greenback could be in the process of setting a short-term peak – a risk highlighted earlier this month. See “US Dollar Showing Tentative Signs of Fatigue: EUR/USD, GBP/USD, USD/JPY,” published October 5.

DXY Index: Interim peak in place?

Market diversity, as measured by fractal dimensions, appears to be low as the DXY Index hit a multi-month high earlier this month. Fractal dimensions measure the distribution of diversity. When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of at least a pause or even a price reversal. For the DXY Index, recently the 65-day fractal dimension fell below the threshold of 1.25, flashing a red flag, pointing to a consolidation/minor retreat at the very least. For more discussion, see “Has the US Dollar Rally Hit Limits? DXY Index Fractals, Price Action,” published October 17.

EUR/USD: Breaks above minor resistance

EUR/USD has broken above minor resistance at the October 11 high of 1.0635 suggesting that the immediate downward pressure has faded a bit. This follows a rebound from a strong cushion at the January low of 1.0480 - a break below would have posed a serious threat to the medium-term uptrend that started late last year. EUR/USD’s rebound could extend a bit further toward the 200-day moving average (now at about 1.0825), roughly coinciding with the 89-day moving average (now at about 1.0725).

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