The U.S. Federal Reserve could prompt a bigger U.S. dollar recovery that could see the greenback climb to levels not seen since mid-May.

The dollar has drawn support from traders wary of a surprise from the Fed which is set to begin a two-day policy meeting on Tuesday. Markets expect no immediate changes to monetary policy, but with positioning heavily loaded against the dollar, investors are wary of any shift in tone that could spark a rally.

FX speculators have been increasingly bearish on the dollar, week on week, since April, but there are signs that the greenback could now see an extended squeeze higher, putting outstanding shorts in danger .

The USD index, which tracks the dollar versus a basket of six currencies, last week closed above the 90.445 Fibo, a 23.6% retrace of its 93.439 to 89.533 (March to May) drop. The technical outlook is tilted towards further gains to 91.025 Fibo, 38.2% retrace of the same 93.439 to 89.533 drop.
Source: Reuters (by Martin Miller)