US dollar breaks out on Fed, tax reform anticipation as ECB-driven euro slides

The US dollar index broke out to the upside on Thursday as markets eagerly awaited the appointment of a new Federal Reserve Chair by President Donald Trump, and the US House of Representatives passed a Senate budget that will open the path to impending US tax cuts. Earlier in Europe, the European Central Bank issued a dovish policy statement and decision that pulled down the euro currency, which helped to boost the US dollar further.

The ECB kept interest rates on hold and announced plans to cut its QE purchases to €30 billion per month from its current €60 billion starting in January, as widely expected. However, the central bank also stated that it will extend its bond purchase program until at least September of 2018, which is later than expected, and could extend it even further than that. In addition, ECB President Mario Draghi said that the bond purchases could temporarily be increased if necessary, and that the QE program will not end abruptly. Overall, the ECB’s focus on a very cautious and drawn-out tapering process that avoids pushing the euro higher was clearly more dovish than markets had been expecting.

This drop in the euro combined with anticipation of President Trump’s pick for the new Fed Chair, as well as greater prospects for US tax reform, all helped to give a strong boost to the US dollar on Thursday. As a result, the US dollar index, which is a measure of the US dollar’s value against six other major currencies, tentatively broke out above a large inverse head-and-shoulders pattern, a technical chart pattern that suggests a potential bottoming and possible upside reversal for the instrument. On Thursday, the dollar index rose sharply to breach the key 94.00 resistance level, which is the “neckline” and trigger point for the head-and-shoulders pattern. With any further follow-through on this breakout, the next major upside targets are around the 95.50/96.50 resistance areas, followed further to the upside by the head-and-shoulders measured target around 97.00.

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