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The Fed announced this week it will keep interest rates at zero until late 2014. There’s no question this is bad news for the US dollar. However, we could see a short-term rebound in the dollar soon. Take a look at the daily chart of the dollar index below. This index measures the performance of the buck against six other major currencies.

As you can see, the dollar is now testing a key support line. This is key because it’s the neckline of a major inverse head & shoulders pattern. Once the dollar broke above that neckline, it confirmed the dollar was in a big uptrend. But that was before the Fed’s statement.

The dollar has been dropping for the last few days. The latest Fed announcement will now put more pressure to the downside. But if this key support line holds, the dollar should move higher from here.

However, I think the most likely scenario now is the dollar will end up breaking below that line. When that happens, we will have a false inverse head and shoulders. In that case, the dollar could move much lower. False breakouts tend to lead to massive moves in the other direction.

In this particular case, the breakout above the neckline was indicating the dollar would move higher. But now it looks like this was a false signal. So keep watching that line. If the dollar index breaks below it, Bernanke will get what he wants: a much weaker dollar.

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