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DXY Index Eyes Breakout Opportunity to Fresh Yearly Highs

DXY Index Eyes Breakout Opportunity to Fresh Yearly Highs

2018-07-18 12:05:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- Fed Chair Jerome Powell sounded hawkish yesterday and is likely to again at the House Financial Services Committee later on this morning.

- The DXY Index is less than a quarter of a percent from its yearly highs established in mid- to late-June around 95.53.

- Retail traders are starting to become more bearish on the US Dollar, which bodes well for its near-term outlook.

See our longer-term forecasts for the US Dollar, Euro, British Pound and more with the DailyFX Trading Guides

The US Dollar (via the DXY Index) is closing in on its highs of the year established in mid- to late-June around 95.53 as market participants continue to bid up the greenback as rate hike expectations rise following Federal Reserve Chair Jerome Powell's testimony on Capitol Hill in front of the Senate Banking Committee yesterday.

Today, more of the same is expected for the US Dollar, with the Fed chief set to climb Capitol Hill once more, this time to testify in front of the House Financial Services Committee. Not much has changed over the past 24-hours, so anything less than a hawkish tone - as was the case yesterday - will prove disappointing for dollar bulls.

Yesterday Fed Chair Powell noted that “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate.”

Following yesterday's testimony by the top US monetary policy official, Fed funds futures are pricing in 9% chance of a 25-bps rate hike in September (the third of 2018) and a 63% chance of a hike in December (the fourth of 2018). Coming into this week, odds for hikes in September and December were near 86% and 58%, respectively.

DXY Index Price Chart: Daily Timeframe (July 2017 to July 2018) (Chart 1)

DXY Index Eyes Breakout Opportunity to Fresh Yearly Highs

The US Dollar's (via DXY Index) technical posture has strengthened considerably over the past 24-hours. Price is now comfortably above its daily 8-, 13-, and 21-EMAs, and gains yesterday forced the moving average envelope into a full 'bullish' setup. Both daily MACD and Slow Stochastics have reissued a 'buy' signal in bullish territory following yesterday's price action.

Needless to say, the potential for further gains by the US Dollar has increased. However, the opportunity for a breakout to fresh yearly highs would only be valid given a move through the June 21 bearish daily key reversal and June 27 to 29 evening doji star candle cluster highs at 95.53.

Consequently, a move through 95.53 this week would also constitute price retaking the uptrend from the April and June 2018 swing lows, suggesting that the recent consolidation has been nothing more than a breather before further gains are achieved.

Read more: US Dollar Higher as Fed Chair Powell Sticks to Script on Gradual Hikes

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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