The US dollar currency index (DXY) experienced a notable decline, hitting a four-month low following the latest decision on interest rates by the Federal Reserve. Despite maintaining the federal funds rate at 5.25% – 5.50%, the dollar faced a downturn due to the dovish commentary that accompanied the decision. Jerome Powell’s subtle suggestion that the rate hike cycle, initiated in the early months of the previous year, might be coming to an end resonated with market participants.
The Federal Reserve, expressing a cautious stance, emphasized its commitment to avoiding the mistake of prolonged high rates. Powell hinted at the possibility of rate cuts at the beginning of the upcoming year. Market expectations, as indicated by the CME FedWatch Tool, suggested an 89% probability of lower rates after the March meeting. Additionally, it reflected anticipation of over 150 basis points in rate cuts over the course of the next year.
Technical
On the 4H chart, the ascending channel that was present since late November witnessed a sharp breakdown as the dollar slumped to multi-month lows. The 25-SMA (green line) confirmed the bearish developments by crossing below the 50-SMA (orange line). However, the RSI indicates oversold conditions, which could result in a pivot in the closing sessions of the week.
The dollar index found support at the 61.8% Fibonacci golden ratio of 102.535, which could act as a pivot point in the upcoming session. The first resistance level is established at 102.855, which could open the way for a retest of the 103.185 level if it fails to prevent a sustainable retracement. The prior Fibonacci midpoint at 103.446 could then come into play as the DXY initiates a path to retesting the channel’s breakdown level.
However, if the price fails to clear 102.855 in the upcoming sessions, a breakdown at 102.535 remains possible. Lower support at 102.368 and 102.228 could then come into play as we head into the new week.
Summary
After the dovish commentary by the Federal Reserve on Wednesday, the US dollar fell to multi-month lows against a basket of peers. The support at 102.535 could be crucial in determining whether a retracement of the recent selloff could occur in the upcoming sessions.
Sources: Koyfin, Tradingview
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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