The US dollar is strengthening, buoyed by a combination of factors. Firstly, upbeat data on US manufacturing growth, the first expansion in a year and a half, has caused investors to reassess the Federal Reserve’s monetary policy stance. The market now anticipates a delay in the Fed’s interest rate cuts, with expectations of a June rate cut dropping from 70.1% to 61.3%. This strengthens the dollar against other currencies as interest rate differentials become more favourable for the US.
Secondly, concerns about a global economic slowdown are putting a safe-haven bid under the dollar. The ongoing weakness in the Eurozone and China, coupled with a recent slump in commodity prices, is prompting investors to seek refuge in the dollar.
Finally, intervention by Japanese authorities to curb the yen’s depreciation is indirectly supporting the dollar. The Bank of Japan’s cautious approach to monetary tightening, despite a recent rate hike, is weakening the yen, further strengthening the relative value of the US dollar.
Technical Analysis
The 4-hour chart shows that the DXY is currently trading at 105.050, extending its four-day ascent. The price action sits comfortably above the upward-sloping 20-SMA (green line), 50-SMA (blue line) and 100-SMA (orange line), indicating a strong bullish trend.
Resistance sits at 105.291, with a break above potentially reaching 105.693. However, with the RSI (71.88) at overbought territory, a potential retracement could find support at 104.463. A significant break below this level, with high volume, could signal a trend reversal, targeting 104.006 and 103.478.
Summary
The US dollar is enjoying a bullish run on the back of positive US economic data, a potential delay in Fed rate cuts, and global economic jitters. Technically, the DXY is in an uptrend, potentially reaching 105.693 if the bullish momentum persists. However, overbought RSI readings suggest a potential pullback towards 104.463.
Sources: TradingView, Trading Economics, Reuters, Dow Jones Newswire.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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