US Dollar bears on top and eyes are on a break of 106.00

• US Dollar is on the backfoot and bears are lurking at key resistance. 
• A break of 106.00 could seal the deal for the bears. 

The US Dollar retreated across the board on Tuesday with investors looking past worries about China's COVID flare-ups ahead of Wednesday's Federal Open Market Committee Minutes.

A day after fresh COVID-19 curbs in China fuelled a risk-off tone to start the week, risk appetite reversed. Equities and high-beta currencies were favored, putting the US Dollar into a downward spiral. The DXY index, that measure the greenback vs. a basket of currencies was last seen down by over 0.5% near the lows of the day at 107.121. 

The ebbs and flows of the market see the currency respecting technical structures and targets with the 38.2% Fibonacci retracement level acting as a relatively firm resistance near 107.50/70s. Meanwhile, there are prospects of a pivot from the Federal Reserve due to recent cooler-than-expected inflationary data within economic releases, notably the last US Consumer Price Index.

Focus on the Fed

Investors will be parsing minutes from the Fed's November meeting, due on Wednesday, for any hints about the December meeting and the outlook for interest rates thereafter with respect to the terminal rate. WIRP suggests a 50 bp hike on December 14 is still fully priced in, but the swaps are starting to gain price in around 30% odds of a terminal rate near 5.25%, according to analysts at Brown Brothers Harriman. ''Those odds will surely change after we get core PCE December 1, jobs data December 2, PPI December 9, and CPI December 13.  However, it’s worth noting that the US economy continues to grow above trend in Q4 and the market should not underestimate the Fed’s need to tighten further.''

Analysts at TD Securities see the minutes shedding 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.''

US Dollar technical analysis

On the back side of the counter-trendline, (bearish), bears are lurking at a 50% mean reversion but the price may already have found a ceiling at the round 107.50/70s. 

The W-formation is seeing the price revert into the neckline and towards the 38.2% Fibonacci of the prior bullish impulse. A break of 106 could seal the deal for the bears.