The Dollar Index (DXY) experienced a subtle retreat last week as traders pivoted toward the prospect of early rate cuts by the Federal Reserve.
A marginal dip of one basis point slightly offset the robust gains witnessed in the initial week of the new year. This shift in sentiment was triggered by an unexpected downturn in U.S. producer prices during December, defying expectations of a 0.1% increase by contracting 0.1%.
The resultant slide in Treasury yields amplified market speculation, propelling the likelihood of a rate cut from 62.6% a mere week ago to a notable 70%, according to the CME FedWatch tool. As traders navigate the current economic landscape, all eyes are now on the upcoming economic calendar, with heightened anticipation for key indicators such as U.S. retail sales and jobless claims.
Technical
The Dollar Index (DXY) is engaged in a broader downtrend as it follows a discernible descending channel pattern beneath the 100-day moving average on the daily timeframe.
Succumbing to downward pressures, it found support at the 100.617 level, coinciding with the lower boundary of the descending channel amid oversold Relative Strength Index (RSI) conditions. An ensuing upsurge propelled the index towards the upper channel boundary, aligning precisely with the 61.80% Fibonacci Retracement Golden Ratio. Despite this, the index has entered a consolidation phase within a rectangle pattern, signalling market indecision.
Market participants keenly await a breakout, with a downside move potentially targeting the 100.617 level, a crucial point of interest. Conversely, an upside breakout beyond the channel and Golden Ratio could trigger a retest of the 104.262 resistance level, established in December after the swift downturn.
Summary
In conclusion, the Dollar Index’s recent subtle retreat reflects the delicate balance between economic indicators and market sentiment. Amid the ongoing consolidation, traders await a potential breakout, with implications for both downside risks or a retest of the 104.262 resistance.
Sources: U.S. Bureau of Labor Statistics, CME, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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