US Dollar bulls bounce back to life, eye 50% mean reversion and beyond

• US Dollar bulls emerge at key support and eye a 50% mean reversion.
• Risk-off tones are benefiting the safe haven US Dollar ahead of key data and FOMC minutes. 

The US Dollar, as measured by the DXY index, is up 0.85% at the time of writing. The index, which measures the US Dollar vs. a basket of currencies, is correcting a small portion of the November sell-off and is on track for a break above 108 the figure having made a high of 107.993 so far.  The catalyst for the move can be partly out down to a risk-off start to the week due to fresh COVID-19 curbs in China that have fuelled worries over the global economic outlook.

• China doctors have made a stark warning to Pres. Xi

Boosting the US Dollar, the new cases and warnings by health officials to the government have cast doubt on hopes that the government could soon ease its tough restrictions. 

The rebound in the greenback follows the sharp selloff over the last few weeks that saw the Dollar Index DXY fall by as much as 4.7% in November. Speculators’ net long USD index positions have declined in a moderate fashion at the same time a drop occurred in the spot market that followed the softer-than-expected print for US CPI inflation data. Additionally, net EUR long positions continued to grow and are now three times larger than their levels in mid-October.  This gives room for corrections in the euro that support the prospects of a recovery in the US Dollar that remains up 12% for the year.

FOMC minutes eyed

For the week ahead, the Fed minutes will shed light on the FOMC's deliberations regarding the expected downshift in the pace of rate increases. ''With that said, policymakers will also emphasize that the terminal rate is likely edging higher vs prior expectations as the labor market remains overly tight. In terms of the data, we look for the mfg PMI to recede modestly, staying above the 50 level in November,'' analysts at TD Securities said. 

US Dollar technical analysis

The DXY index has started to correct the prior bearish daily impulse and is headed towards a 50% mean reversion of the last leg of the M-formation. If, however, the resistance of the counter-trendline and neckline of the M-pattern hold, the downside will remain in focus and a test of 104.70 could play out.