Last week, the dollar index saw a slight rebound after four consecutive weeks of losses. However, upon closer examination, it appears to be a brief period of profit-taking by sellers before a potential new downward trend. The pressure on the US dollar began in late June when the Federal Reserve acknowledged progress in reducing inflation. This led money markets to anticipate a 94% chance of a rate cut in September, a significant increase from just 46% a couple of months ago.
The changing expectations have caused short-term bond yields to decrease, which in turn has diminished interest in the dollar. Approximately 2% has been shaved off the dollar’s value in the last month as a consequence. Moreover, the technical analysis of the Dollar Index (DXY) reveals several key levels being breached, indicating a potential downward trend.
Since early July, sustained pressure on the dollar has pushed it out of an upward channel. A descending corridor has been established, with upper and lower boundaries encompassing peaks and lows from recent months. The Dollar Index has struggled to surpass the 200-day moving average, facing resistance for the past ten days. Additionally, the 50-day moving average is displaying a downward trend, potentially signaling a bearish trend ahead.
If the resistance at the 200-day moving average proves insurmountable for bulls, the dollar index could decline towards 102.3 (-1.7% from the current level) in the March lows. A more critical area to watch is around 101 (-2.9%), where previous lows from last year are concentrated. A break below this support level would effectively end the dollar’s bullish momentum seen in 2021-2022, potentially sending the DXY into the 90-92 range.
The technical indicators and analysis suggest that the dollar index is facing significant headwinds and could potentially enter a prolonged period of decline. Traders and investors should closely monitor key support levels and moving averages to gauge the future direction of the US dollar.