Dollar Index: USD unlikely to buck the trend
Fawad Razaqzada April 11, 2016 6:07 PM
<p>One of the big themes in recent weeks has been the depreciating dollar. The most recent meeting minutes from the Federal Reserve clearly show there’s […]</p>
One of the big themes in recent weeks has been the depreciating dollar. The most recent meeting minutes from the Federal Reserve clearly show there’s a lack of harmony within the FOMC, with speeches from several policymakers being mostly on the dovish side of the scale. The Dollar Index has not been helped by the appreciating Japanese yen, rebounding commodity currencies and the euro’s refusal to fall despite the ECB expanding its QE stimulus package in March. Even the pound has managed to stage a two-day rally against the US dollar, with the GBP/USD tacking on about 200 pips from its low on Friday ahead of UK inflation figures on Tuesday. Unless this week’s US data helps to bring forward expectations about the next Federal Reserve rate increase, things could go from bad to worse for the greenback.
For the US dollar bulls, it could be a long wait until at least Wednesday when we will begin to see the release of some significant US macroeconomic data this week. Retail Sales, Producer Price Index (PPI) and Business Inventories will be among the top macro data to watch on Wednesday. Thursday is the big day: the latest CPI measure of inflation will be released then, which will no doubt be watched closely by the FOMC ahead of their meeting later in the month. But even if the CPI shows an unexpectedly sharp rise in the level of prices in the US, the Fed is unlikely to alter its policy at this particular meeting and based on one month’s reading of inflation. The outcome of the latest surveys on consumer sentiment and inflation expectations will be released on Friday from the University of Michigan; these will be important numbers for the dollar, too.
Technical outlook: Dollar Index
The daily chart of the Dollar Index shows the US currency has been making a series of lower lows and lower highs in recent times, mirroring the Federal Reserve’s changing tone. The index is stuck inside a bearish channel and holding below both the 21-day exponential and 50-day simple moving averages, both of which are pointing lower. The latter has recently also moved below the flattening 200-day moving average to create a so-called “Death Crossover.” The medium term technical outlook therefore looks bearish for the Dollar Index and will remain this way until and unless it breaks out of the bearish channel.
In the short-term outlook, the Dollar Index is looking a little bit oversold, at least judging by the RSI indicator nearing 30, though this does not mean the selling is over or will be when it hits this level. The RSI merely points out that the momentum has been bearish for the dollar and can remain “oversold” for long periods. That being said, the recent tests of 30 on RSI have seen a corresponding bounce in the dollar.
Still, with the Dollar Index holding below key short-term resistances such as those shown on the chart (94.35, 94.65 and 95.10), it appears more likely that we will see a continuation of the downward trend at the start of this week than a rebound. There are a couple of potential support levels to watch on the downside: 93.80 and then 92.60/65. The latter was the low from August 2015, which also roughly corresponds with the support trend of the bearish channel. Thus, it would be a big level to watch, should we get there.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.