U.S. Dollar Index (DX) Futures Technical Analysis – Trader Reaction to 97.920 to 97.470 Sets the Tone

The U.S. Dollar fell against a basket of major currencies on Friday after the 10-year U.S. Treasury yield plunged to a fresh record low as investors dumped riskier assets for safer options amid the coronavirus outbreak. The benchmark rate traded at 1.116%, marking the first time ever it traded below 1.2%. The 10-year yield tumbled more than 30 basis points this week alone as the massive sell-off in stocks intensified.

On Friday, March U.S. Dollar Index futures settled at 98.081, down 0.380 or -0.39%.

Yields tumbled as the Fed signaled late Friday it might be willing to support the economy if necessary. Fed Chairman Jerome Powell said the central bank is monitoring the coronavirus for risks it poses.

“The fundamentals of the U.S. economy remain strong,” Powell said in a mid-day statement. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

Traders are increasingly pricing in Fed rate cuts in the coming months. The fed funds market is assigning a 100% chance of at least one rate cut at the Fed’s March policy meeting, according to the CME FedWatch Tool.

Daily Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower. The main trend will change to down when sellers take out the last swing bottom at 97.165.

A trade through 99.815 will signal a resumption of the uptrend. Monday will be the seventh day down from the last main top. This puts the index in a position to post a closing price reversal bottom. We could see this if buyers show up on the test of the main 50% to 61.8% retracement zone.

The main range is 96.020 to 99.815. Its retracement zone at 97.920 to 97.470 is the next major downside target. On Friday, the index touched the top of the zone at 97.910, producing a small technical bounce.

Short-Term Outlook

The near-term direction of the March U.S. Dollar Index will be determined by trader reaction to the retracement zone at 97.920 to 97.470.

If traders have fully priced in a March Fed rate cut then there’s a chance the dollar will rally following a test of this zone. The dollar could also rally if traders begin to treat it as a safe-haven currency again.

If the 50% level at 97.920 holds as support then look for a labored rally with nearby target angles coming in at 98.315, 98.355 and 98.520. Overcoming 98.520 could trigger an acceleration to the upside.

If 97.920 fails as support then look for a break into the uptrending Gann angle at 97.760, followed by the Fibonacci level at 97.470.

The selling could start to get stronger under 97.470.