Dollar Index Analysis: Another 100-pip Rally In The Cards?

Currently, the dollar index (DXY) is trading flat-lined around the 94.90 levels.

The greenback has rallied more than 4 percent from the September low of 91.13. The tide has definitely turned in the favor of the bulls as can be seen on the daily chart below-

The DXY has rallied from 91.13 to 94.90 on the back of-

• Bullish price RSI divergence
• Higher lows pattern as shown by the rising trendline
• Inverse head and shoulders breakout

Also, the 50-day MA has bottomed out and is now sloping upward and the relative strength index (RSI) is bullish and pointing upward.

Thus, odds are high that the index would take out the resistance offered by the trendline sloping downward from the Mar. 9 high and Apr. 10 high and rally another 100 pips to 95.98 (38.2 percent Fib R of Mar/Sep rally).

Clearly the technicals are aligned for a bullish break above the trendline hurdle, however, the fundamentals could play spoilsport...

Tax reform - Delay in tax reform could spell trouble for the US dollar. As Adam Button from AshrafLaidi.com writes, "the House is aiming to pass the tax cut bill this week. The headlines are likely to be positive for the US dollar, but the mood may quickly shift if it encounters problems in the Senate."

China PPI - The factory-gate inflation was primarily responsible for the 'great reflation' trade of 2016. The PPI bottomed out at 5.5 percent in three months to July. It rose 6.3 percent in August and 6.9 percent in September.

The PPI growth is seen slowing to 6.6 percent y/y in October. A weaker-than-expected number could yield USD sell-off, given the strong correlation between the PPI and US inflation expectations.

As seen on the chart below, the US inflation expectations (5y, 5y forward inflation expectations) did bottom out in Jun. 20, but have been restricted to a narrow range since mid-September.

A weak PPI print could weigh over the US inflation expectations and yield USD sell-off.  On the contrary, an uptick in the PPI could boost US inflation expectations and result in a sustained rally in the DXY to 96.00 levels.