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US Dollar Outlook: Short-Term Shakeout Back Into a Zone of Support

US Dollar Outlook: Short-Term Shakeout Back Into a Zone of Support

Nick Cawley, Strategist

US Dollar Price, Chart, and Analysis

  • US Dollar (DXY) remains in the middle of a positive trend
  • Further losses may attract buyers back into the market.

This week’s US dollar sell-off continues today with the US dollar basket (DXY) trading at a one-week low on either side of 96.00. The greenback has now given back nearly all of last week’s Fed-driven rally, with the sell-off helped in part by month-end positioning flows after the heavy losses seen in the US equity space.

The DXY is now back in the middle of a multi-month trend that has steered the greenback higher since mid-2021. The trend higher remains in place with an unbroken series of higher lows and higher highs present on the daily chart. The CCI indicator has moved out of overbought territory to a more neutral reading, suggesting that last week’s excessive bullishness has now been erased. The DXY is also being weakened by strength in some of the other major currencies that make up the basket.

The Euro makes up nearly 60% of the DXY and the currency is currently better bid as the latest ECB policy decision nears against a background of rampant inflation. Eurozone government bond yields continue to tick higher as market expectations that the ECB may even lift interest rates at the end of the year, something that would have been seen as inconceivable a couple of months ago as omicron raged across Europe. Sterling, which makes up around 12% of the basket, is also better bid ahead of this week’s BoE monetary policy decision which is expected to see the UK central bank hike interest rates by 25 basis points to 0.50% and announce further details about how intends to stop reinvesting the proceeds of bonds maturing from its GBP895 billion quantitative easing program.

The DXY is now back in a prior supportive zone which may prove difficult for bears to break. A cluster of prior lows all the way down to 95.50 should prove difficult to break convincingly, setting up the greenback for a period of range trading over the next few weeks.

US Dollar (DXY) Daily Price Chart February 2, 2022

US Dollar Outlook: Short-Term Shakeout Back Into a Zone of Support

What is your view on the US Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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