The US Dollar Index (DXY) finds itself in a pivotal position as market participants gauge the strength of the US economy following the recent hot inflation data and expectations for future Federal Reserve interest rate cuts. The hotter-than-expected February inflation report, with headline figures at 3.2% year-on-year, has cast doubt on the Fed’s ability to deliver the previously anticipated multiple rate cuts in 2024. Markets have trimmed their bets on a June rate cut, with chances now hovering around 67% compared to 71% earlier in the week.
However, the dollar has yet to react decisively to this shift. Investors are awaiting further data releases, such as US retail sales and producer prices, before solidifying their positions. Additionally, the Bank of Japan’s (BoJ) upcoming policy decision is being closely watched as speculation swirls around potential adjustments to their negative interest rate policy. This could significantly impact the Yen and, by extension, the broader USD basket.
Technical Analysis
The 4-hour chart shows that the DXY is currently trading at 102.979, attempting to extend its three-day climb. The price action recently broke above the 20-period Simple Moving Average (SMA) (green line) but remains below the 50-period SMA (blue line) and the 100-period SMA (orange line). This indicates a potential short-term uptrend lacking confirmation from longer-term indicators.
The key resistance level to watch is the 38.20% Fibonacci retracement level at 103.325. A successful break above this level could open doors for short-term trading opportunities towards the 50.00% Fibonacci retracement level (103.553).
However, with the RSI (49.81) trading below the 50.00 level, failure to sustain a break above the 20-SMA would leave the two-month low of 102.358 as the potential immediate support level lower. A break below the initial support on significant volume would likely bring the 101.908 support level into play in the short term.
Summary
The US Dollar’s near-term direction hinges on the interplay between incoming economic data and the Fed’s monetary policy stance. Technically, DXY faces resistance at the 38.20% Fibonacci retracement level, with a break above potentially triggering further upside. Conversely, a drop below the 20-period SMA could lead to a retest of recent lows. The upcoming USUS reports, including the retail sales, will be key data points to watch, potentially influencing the dollar’s trajectory in the coming days.
Sources: TradingView, Trading Economics, USUS Bureau of Labor Statistics, Reuters.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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