HYCM: Does this Dollar Rally Have Potential?

By Giles Coghlan, Chief Market Analyst, consulting for HYCM

FOMC Hawks Speak Out

The release of the last FOMC’s meeting minutes on Wednesday, Feb 22, should provide further context as to the state of consensus among Fed officials regarding February’s 25-basis point hike. Powell has been criticised for not pushing harder against defiant equity bulls, who regard the current tightening cycle as all but over. We’ve also heard since then that there has been some disagreement within the ranks of the FOMC.

Both Cleveland Fed President, Loretta Mester, and St. Louis Fed President, James Bullard, have subsequently stated that they believe the Fed should have hiked by 50-basis points at the last meeting. Mester has said that she believes it will be necessary to bring the Fed funds rate above 5% and keep it there for “some time” if the central bank is to get inflation down to its long-term target of 2%.

Neither of the above hawks enjoy FOMC voting rights this year. The CME’s FedWatch tool is still currently predicting an 81.9% chance that the Fed will hike by another 25-basis points in March.

Economic Data to Strengthen Fed’s Resolve?

Much stronger than expected US retail sales for January (3% against forecasted 1.9%), followed by a PPI print that also came in higher-than-expected (0.7% against forecasted 0.4%), could provide the Fed with the evidence it needs for a larger than expected hike next month, or at least for a much stronger hawkish tone from Chair Powell. Particularly when seen against the backdrop of the recent CPI print, which didn’t provide the proof that the dovish contingent at the FOMC were looking for that inflation is under control.

All the above have been cited as catalysts for the dollar showing signs of strength in anticipation of higher rates for longer. However, as we’ll see below, there are also strong technical reasons for the dollar’s recent advance that predate some of this economic data.

4-Hour Technicals

Technically, the Dixie has made some progress on the shorter timeframes, and this is gradually also being reflected at the longer timeframes. On the 4-hour chart, we’ve seen the DXY reach extremely oversold levels early in February (RSI of 24), coinciding with its local low at 100.8.

This has been followed with a break above all major moving averages, as well as the price respecting the 200-period moving average on at least four occasions before moving higher. We’ve also seen 4-hour higher-highs being set on both February 15 and 17. The next level to look out for is the failed breakout from January 5 at around 105.5. Clearing this level will make a much stronger case for the bulls as this was the last time the price broke above the 200-period MA since November of last year.

Daily Technicals

The daily chart provides a somewhat clearer picture of this recent bout of bullish activity. The DXY has respected its 20-day moving average all the way since breaking down below it back in October of last year. We’ve seen just two breakout attempts, one in November of 2022 and one in early January (also referenced above). On both previous occasions the price broke above the moving average momentarily and fell below it again on the following day, resuming its downward path.

However, on this occasion, since breaking above the 20-day on February 3, the DXY has clocked in eleven full days above it, at the time of writing, while also managing to clear the 50-day moving average as well. The next level to watch is that failed breakout from January, which, from the daily perspective is at just over 105, owing to the lower close of that candle than on the 4-hour chart. Beyond this, we also have the 200-day moving average to keep an eye on, which is currently sitting at around 106.4.

The 100-day is currently crossing the 200-day from above, which could be construed as bearish, however the true “death cross” occurred back in January when the 50-day crossed below the 200-day. This coincided with January’s failed breakout to the day.

This most recent daily higher-high also represents a break above the 23.6% Fibonacci retracement level, with the next line of resistance (38.2%) to be found just below the 200-day moving average at around 105.9.

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