US Dollar Weekly Forecast: Without Need for Safety, DXY May Keep Getting Punished

US Dollar Weekly Forecast: Bearish

• US Dollar sinks amid dovish Fed bets & Wall Street resilience
• No signs of a deflationary spiral meant traders forwent havens
• The technical setup might look increasingly bearish for DXY

The Fundamental Story

The US Dollar was crushed by investors last week. In fact, this 5-day period was the worst for the DXY Dollar Index since early January. Let us take a closer look at what happened and whether more of the same could be in store for the week ahead.

As far as economic data was concerned, the latest US CPI and PPI reports were of key focus last week. The former showed a mixed reading as headline inflation unexpectedly surprised lower while underlying price pressures rose in March year-over-year. However, traders paid more attention to wholesale inflation which broadly surprised lower for the same period.

It could be argued that the data last week continued to paint the story of cooling price pressures ahead. That could open the door to a Federal Reserve that soon stops its tightening cycle. This is the story that has been driving markets of late, as well as rising expectations that the central bank will pivot to easing policy towards the end of this year.

However, if you look at evolving inflation expectations, something interesting is going on. This can be seen by looking at the 2- and 5-year breakeven rates in the chart below. When the 2020 global pandemic unfolded (green line), there was a material decline in inflation expectations as the deflationary mindset of a recession kicked in. The same reaction to SVB’s collapse (red line) is absent for the time being.

Granted, there has been a cautious deceleration in breakeven rates since SVB’s collapse, but nothing yet that speaks of a deflationary spiral. Meanwhile, the US labor market broadly is for the most part, resilient. This could be driving the message that markets are looking at a scenario of a mild slowdown, and stock markets are rejoicing. As such, in the short term, there doesn’t seem to be much love in store for the haven-linked US Dollar ahead.

No Signs of a Deflationary Spiral Yet?

The Technical Side of Things

From a purely technical standpoint, the US Dollar is at its next breaking point. Keep a close eye on the 100.82 – 101.297 support zone. This has been in play since February. Meanwhile, positive RSI divergence is brewing, showing that downside momentum is fading. Breaking lower opens the door to extending losses that began back in September. A near-term falling trendline from March is also guiding DXY lower. Breaking lower offers an increasingly bearish outlook, exposing the midpoint of the Fibonacci extension level at 98.904.

DXY Daily Chart

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX