U.S. Dollar Index (DX) Futures Technical Analysis – Weakened on Reduced Likelihood of Larger Rate Hike

Key Insights:

• U.S. labor data showed slower wage growth, causing the dollar to weaken.
• Treasury yields fell as the likelihood of a smaller rate hike increased, reducing the appeal of the already strong dollar.
• The market had previously expected a 50 basis point hike, but data suggests a smaller increase may be more likely.

On Friday, slower wage growth in the US labor data suggested that inflation pressures are easing, causing the US dollar to weaken. The Federal Reserve could implement more modest interest rate rises than previously expected as a result.

Although the US economy added jobs at a brisk pace in February, slower wage growth and a rise in the unemployment rate led financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers end a two-day meeting on March 22.

On Friday, June U.S. Dollar Index futures settled at 104.152, down 0.7560 or -0.73%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) finished at $28.36, down $0.17 or -0.60%.

Easing Inflation Pressures Could Prompt Fed to Make Smaller Rate Hike

The closely watched employment report by the Labor Department showed nonfarm payrolls increased by 311,000 jobs in February, and data for January was revised lower to show 504,000 jobs added instead of the previously reported 517,000. Economists had predicted job growth of 205,000.

However, average hourly earnings for all private workers rose 0.2% compared to 0.3% in January, lifting the year-on-year figure to 4.6%, less than the expected hourly earnings growth of 0.3% in February that would have raised wages by 4.7% annually.

As a result of falling Treasury yields and the reduced appeal of an already strong dollar, the probability of a 50 basis point hike on March 22 decreased from 71.6% to 41% in Fed funds futures.

The market, which had expected a 50 basis point hike, is now uncertain as to whether the Fed needs to go bigger at its meeting in two weeks, given that the data is not as hot as the blowout jobs report for January.

The market is now focusing on the consumer price index, scheduled for release on March 14, as a significant data point indicating that inflation remains elevated, but the near-term pressures are not as acute as feared.

Daily June US Dollar Technical Analysis

The main trend is down according to the daily swing chart. The trend turned down on Friday. A trade through 105.490 will change the main trend to up.

The main range is 106.917 to 100.345. The index is currently trading inside its retracement zone at 103.361 to 104.406.

The short-term range is 100.345 to 105.490. Its retracement zone at 102.918 to 102.310 is the next target area.

Daily June US Dollar Index Technical Forecast

A sustained move over 103.361 will indicate the presence of buyers. Overtaking the Fibonacci level at 104.406 will indicate the buying is getting stronger. This could extend the rally into the main top at 105.490.

Bearish Scenario

A sustained move under 103.361 will signal the presence of sellers. This could trigger an acceleration into the short-term retracement zone at 102.918 – 102.310.