DXY: Reversal or correction? Insights from the DXY index

[MongiIG]

Explore the recent challenges faced by US dollar bulls and decipher whether the DXY index's decline signifies a reversal or correction in this comprehensive analysis.

 

Source: Bloomberg

 

Forex United States dollar Japanese yen Inflation Recession USD/JPY

 Tony Sycamore | Market Analyst, Australia | Publication date: Wednesday 22 November 2023 05:24

Dollar decline drama

It's been a testing few weeks for US dollar bulls. The US dollar index, the DXY, is now down over 3% month to date, the sell-off gaining momentum after the cooler-than-expected inflation print.

US dollar weakness in November is generally to be expected. Last year, the USD index, the DXY, fell 5% in November. The USD sell-off coincided with an 8% rally in the S&P 500 during November as the market unwound defensive positioning across multiple asset classes, put on in anticipation of a hard landing.

This November, the sell-off in the US dollar and the rally in equities has come following a run of softer economic data across PMIs, Non-Farm Payrolls, and inflation that raises hopes the Fed has ended its rate-hiking cycle and is on track to deliver an elusive soft landing.

Is it a reversal or just a correction?

While we have likely seen peak growth and interest rates in the US, US growth after the current rebalancing is still expected to outperform, particularly in contrast to the EU and the UK. A situation that will support US earnings, US yields, and the dollar.

On the other side of the coin, if a deeper downturn were to eventuate and/or Donald Trump wins the US Presidential election next year, the anticyclical US dollar would likely be supported. Hence, the USD wins again.

USD vs. JPY: a wild card

The biggest wild card could be the USD against the JPY. While we are inclined to think a multiyear double high is in place for USD/JPY at 151.95ish and that the JPY is beyond cheap, the USD still holds a significant yield advantage over the JPY. Some aggressive normalization of BoJ policy is required for that to change.

DXY technical analysis

The rally in the US dollar index, the DXY, from the July 99.57 low took the DXY to 107.34, the 50% fibo retracement of the decline from the October 2022 114.78 high to the July 2023 99.57 low. The retreat from the 107.34 high saw the DXY this week test the 200-day moving average, currently at 103.61, the level at which the DXY closed overnight.

Given the DXY’s attempt overnight to reclaim support coming from the 200-day moving average and the oversold nature of the decline, we suspect a bounce is looming that sets up some range trading into yearend. A range that might look like something like 103.00 to 105.50ish.

If the DXY were to lose the support of the DXY for a sustained period, it would warn that a deeper decline is underway.

DXY daily chart

 

Source: TradingView

 

• _{TradingView: the figures stated are as of 22 November 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}

 

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

[Bash4j]

The implication of this DYX index on the Crypto Space could be:
A strengthening U.S. dollar can have both positive and negative implications for the crypto space:

   - Positive Implications: A stronger U.S. dollar may attract investors seeking a safe-haven asset, which could lead to a decrease in demand for cryptocurrencies. Additionally, a stronger dollar can impact dollar-denominated stablecoins, potentially increasing their purchasing power and stability.

   - Negative Implications: A stronger U.S. dollar can make cryptocurrencies relatively cheaper for holders of other currencies, potentially attracting international investors. It may also signal a shift in global market sentiment, with investors seeking alternative assets with potential cryptocurrencies like BTC, an Bitget BGB, and ETH as a hedge against traditional fiat currencies.

[phillo]

my chart, DXY may need to go lower to obtain enough liquidity to go back up 

[phillo]

DXY updated chart - note discount on previous chart should have been premium 

[phillo]

DXY   now wait for confirmation or rejection 

[phillo]

chart update - maybe ???

[MongiIG]

16 minutes ago, phillo said:

chart update - maybe ???

Hi @phillo
 

Thanks for sharing and tracking the US Dollar basket.

Do you think the dollar will start to strengthen?

 

 

Cheers - MongiIG

[phillo]

that's the plan, but I see it as a slow process

[phillo]

[MongiIG]

22 hours ago, phillo said:

that's the plan, but I see it as a slow process

 

Source: Bloomberg

 

 Diego Colman | Market Analyst, New York | IG | Publication date: Friday 01 December 2023 04:57

The US dollar, as measured by the DXY index, extended its recovery on Thursday, boosted by a bounce in US treasury yields following remarks from San Francisco Federal Reserve president, Mary Daly indicating that the FOMC is not yet considering slashing borrowing costs. Daly's forceful position, which clashes with the more cautious posture embraced by other colleagues, highlights a widening chasm between the doves and the hawks.

Upcoming market events

 

Source: DailyFX

To address uncertainties regarding the broader central bank’s stance, traders should closely monitor Fed chair Jerome Powell’s speech at Spelman College on Friday. This event might serve as a platform for the FOMC chief to provide clarification on the monetary policy outlook.

Hawkish comments endorsing higher interest rates for longer are likely to exert upward pressure on US yields, creating the right conditions for the dollar to prolong its nascent rebound. On the flip side, a lack of pushback on dovish market pricing ( many rate cuts for 2024 already discounted) could drag yields, weighing on the greenback.

[phillo]

[phillo]

Lot of uncertainty now, Fed rate decision on Wednesday, guess it's more about what Powell says than does . Seen folks talk about an inverse H&S, but we have to wait and see 

[phillo]

breaking higher , albeit rather slowly 

[phillo]

[phillo]

[MongiIG]

23 hours ago, phillo said:

Trading volatility: DXY on US Q1 GDP

With the US economy seemingly able to cope with relatively high US interest rates there’s the potential for this coming week's US GDP reading for Q1 to be strong.

 

Written by: Jeremy Naylor | Analyst, London

 

Publication date: Friday 19 April 2024 10:08

If this comes to pass there will inevitably be a long trade to be had around the US dollar. IGTV’s Jeremy Naylor looks at likely levels which may be key. The data is out on Thursday 25 April.

(AI Video Summary)

U.S. GDP data

Anticipation of strong U.S. GDP data for the first quarter, expected to affirm the resilience of the U.S. economy amid high interest rates. This optimism is reflected in the forecast of the U.S. dollar's strength, particularly noted in the dollar basket's potential movement.

Traders are advised to watch for a break above 106.19 in the dollar basket, suggesting a move to 106.98 on a robust GDP outcome. This analysis is tied to expectations that the Federal Reserve may maintain its hawkish stance on interest rates to combat inflation, impacting dollar positions and providing key insights for financial enthusiasts interested in currency markets and economic indicators.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.