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Dollar Technical Analysis: Recent Hikes Have Led To Peaks in DXY

Dollar Technical Analysis: Recent Hikes Have Led To Peaks in DXY

Tyler Yell, CMT, Currency Strategist


Talking Points:

-Dollar Technical Strategy: favoring strength, close > 102.84 opens up 103.65/82

-Previous Post: Dollar Technical Analysis: DXY Rides Into March On A High Horse

-History of Recent Fed Hikes Have Led To ST Peaks in Yields & DXY

-If you’re looking for trading ideas, check out our Trading Guides

The bar for a USD-positive surprise is high, really high. When a rate hike is priced as it is with Wednesday’s FOMC announcement, many traders have turned their focus on whether anticipated rate hikes for the Fed would shift via the median DOT in the DOT plot from three hikes to four hikes this year. Should the Fed fall short, we may see a familiar pattern where a rate hike and less hawkish forecast from the Fed led to a weaker US Dollar in the following months.

Now, the DXY is at an important crossroads from both a technical, sentiment and fundamental point of view. Naturally, traders have been optimistic about US growth due to the consistent surprises in economic data, which also helped reinforce the Fed’s consensus as per recent Fed President Speeches about raising rates multiple times this year.

Looking back over the December 2015 and 2016 rate hike, the hikes marked near tops in the USD. After the 2015 hike in December, the USD traded sideways until finally breaking lower in late-January and trading lower until the following May. Given the Dutch and upcoming French vote in a few months, we could see the EUR take the USD on a wild ride and the G20 meeting this weekend in Germany could also stir up JPY. Currency, trade, and regulations are going to be a focal point of this G20 meeting, which should present some weekend headline risk for major currencies.

Technical View: After the2015 rate hike, the DXY hit a lower high at the 78.6% retracement of the pre-rate hike range of 100.51-97.19. Similarly, the price subsequently failed to hold above the 55-DMA and when broke, began a sharp drop, which aligned with aggressive JPY strength.

Either way, we should be on the watch for how the price reacts to the range between the 61.8-78.6% (102.07/84) retracement zone of the pre-rate hike zone of 2017 of 103.82-99.23. If the price can break above this zone, which would likely align with the hoped-for hawkish lean that the Fed breaks toward the ‘dot’ shift to four hikes, I encourage you to be prepared for further USD strength.

If the price fails to break above the 102.07/84, and subsequently breaks below the 55-DMA, we may be setting up for a drawn-out drop in the USD. It’s difficult to imagine DXY weakness like what was seen in early 2016 that aligned with the Yuan-devaluation panic. However, at the same time, buying USD on a close below a major moving average, currently sitting at 101.42, could set you up for a lot of frustration if other currencies become strong in the wake of USD weakness.

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Chart created by Tyler Yell, CMT


Shorter-Term DXY Technical Levels for Wednesday, March 15, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours of trading.


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