The Dollar Index (DXY) has recently experienced a notable shift in market sentiment, witnessing a short-term selloff following a period of strength that propelled it to a three-month peak.
Cautious market sentiment, particularly ahead of the pivotal PCE Price Index release, led to the index sliding for the first time last week after five consecutive weeks of gains. Notably, the Dollar was boosted by robust domestic data, including a blowout of the January Nonfarm Payroll report and an inflation uptick to 3.1%.
Moreover, the Federal Reserve’s hawkish stance, as outlined in its recent FOMC Minutes, has contributed to the Dollar’s strength, with the central bank emphasizing the need for further moderation in inflation before considering interest rate cuts. The notable shift in sentiment regarding monetary policy is evident in the declining probability of a rate cut in May, now at 17.1% from a high of 51% a month ago, according to the CME FedWatch Tool. This week’s release of the PCE Price Index will serve as a crucial determinant of whether the current restrictive monetary policy will persist or undergo a shift in direction.
Technical
The Dollar Index (DXY) exhibited a strong uptrend initially, supported by trading above its 100-day moving average, signalling bullish sentiment.
Consolidating within a rectangle pattern, the index eventually broke out to the upside on significant volume, with sturdy support at the 102.901 level. However, as the index surged to 104.963, overbought conditions on the RSI led to a reversal, driving the index towards the 61.80% Fibonacci Retracement level.
If the market respects this level as intermediate support, a reversal back to the upside could occur, potentially retesting the 104.963 level if buying momentum resumes. Conversely, a breakdown below the Golden Ratio, especially on high volume, may signal further downside potential, with the 102.901 support level emerging as a critical point of interest in a bearish scenario.
Summary
The Dollar Index (DXY) faces a nuanced outlook amid cautious sentiment ahead of the PCE Price Index release. Technical analysis suggests potential support at the 61.80% Fibonacci Retracement level. Traders await market sentiment and price action cues to gauge the index’s momentum and direction.
Sources: CME, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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