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US Dollar Outlook: DXY Aims Higher on Robust Data, Taper Risk

US Dollar Outlook: DXY Aims Higher on Robust Data, Taper Risk

Rich Dvorak, Analyst

US DOLLAR FORECAST: DXY INDEX BUILDS SUPPORT AS FED TAPER FEARS MOUNT

  • US Dollar is gaining ground quickly during Thursday’s trading session to hit three-week highs
  • DXY Index looks like it might extend its stretch to the upside after bouncing off key support
  • FOMC taper risk, combined with a string of solid data releases, could drive the US Dollar bid
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US Dollar bulls are flexing their muscles on Thursday and steering the Greenback sharply higher. The broader DXY Index is up around 0.6% intraday to trade at its strongest level in three-weeks. This influx of US Dollar buying pressure looks both fundamentally and technically driven. On the fundamental side, traders are likely still digesting news out of the Federal Reserve released after-hours yesterday.

The Fed announced that it will unwind its corporate credit lending facility by year-end. Seeing that this facility was closed on 31 Dec 2020 and only holds $13.7-billion worth of assets, some pundits have dismissed the headline. I would argue, however, that the messaging behind the move and its impact on market sentiment is more profound than what simply meets the eye.

Some FOMC officials have professed that it ‘is not the time to start talking about tapering yet,’ but surely there must have been a conversation internally at the Federal Reserve to make this decision. More importantly, the fact of the matter is the Fed is now officially planning to sell (i.e. taper) some assets that were accumulated during the covid crisis. This likely stands to intensify the Fed taper debate amongst market participants and fuel US Dollar strength in turn as traders price in the threat of Fed tapering.

DXY – US DOLLAR INDEX PRICE CHART: WEEKLY TIME FRAME (09 DEC 2019 TO 03 JUN 2021)

DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

Not to mention, the latest ISM Services PMI report was just released this morning and topped consensus forecast. Headline ISM Services PMI data crossed the wires at 64.0, which was above estimates of 63.2 and topped the prior reading of 62.7 for April. This followed robust jobs data released earlier in the morning with ADP employment showing an increase of 978K and initial jobless claims dropping to 385K.

These upbeat employment figures could serve as a precursor to tomorrow’s high-impact release of nonfarm payrolls (NFPs) due at 12:30 GMT. More evidence of the labor market recovering revealed in tomorrow’s NFP report might help drive the US Dollar higher with Treasury bond yields. Conversely, a disappointing NFP report likely stands to keep Fed taper hawks at bay and might see US Dollar bears fade the recent influx of strength.

Shifting focus to the technical landscape, we see the DXY Index has been basing around the 89.50-price level. A DXY chart with weekly candlesticks helps filter out the noise and illustrates this formidable layer of technical support underpinned by late 2020 and year-to-date lows. Recoiling higher off this support level seems to have invalidated the short-term descending trendline. A weekly close above this technical barrier could provide confirmation and motivate a bigger push by US Dollar bulls toward the 92.00-handle.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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