Dollar Rally Faces 'Critical Resistance,' But Bulls Will Hold The Line

© Reuters.

By Yasin Ebrahim

AiVIF.com – The dollar is approaching 'critical resistance' that may force some to take profit, but this isn't the time to turn bearish as any dips will likely be bought paving the way for further upside, experts say.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose 0.22% to 93.99.

The dollar is approaching “critical resistance” of 94.47 to 94.76, and could be set for “some consolidation,” Commerzbank (DE:CBKG) said in a note.

While the short-term path for dollar is likely paved with resistance, the overarching backdrop for the dollar is favorable as further positive economic data will likely strengthen the Federal Reserve’s case to tighten its monetary policy measures.

Data on Tuesday showed the ISM services index rose to 61.9 from 61.7, confounding economists’ expectations for a decline to 59.9.

In sign that inflationary pressures remain elevated, the prices paid component of the ISM non-manufacturing report showed prices paid rose to 77.5 from 75.4.

“Prices paid remains at a very high level, and it is consistent with a host of other metrics that reflect elevated prices pressures,” Jefferies (NYSE:JEF) said in a note.

The ongoing pace of inflation could force the Fed to hike rates sooner than many expect.

“[A]gainst the backdrop of elevated inflation and rapidly rising energy costs, many market participants are skeptical the FOMC will be able to maintain these low rates for another year, let alone two,” Stifel said in a note.

As well as expectations for tighter monetary policy, the dollar has been boosted by a rise in safe-haven demand in the wake of difficulties in China that are set to continue.

“The headwinds to risk sentiment stemming from China’s property sector are far from over,” ING said. “In FX, we think this will continue to provide reasons not to turn any bearish on the dollar…”