US Dollar Forecast: DXY Advances as Rate Hike Odds Climb, Peace Efforts Falter

Dollar Holds Gains as Peace Deal Hopes Continue to Fade

The U.S. Dollar is trading flat against a basket of major currencies early Friday as it tries to build on this week’s gains. It’s been an impressive week so far with the market posting a three-day rally after a steep plunge on Monday. The catalyst behind the strength is safe-haven buying tied to concerns over an escalation of the war between the United States and Iran, and the dimming hopes of a peace deal between the two warring countries.

Trump’s Mixed Messages Are Fueling Volatility

The financial markets remain on edge as the rollercoaster week winds down with heightened volatility still being driven by a number of comments from President Trump. If the President thinks he is calming the markets by keeping investors informed then his message is falling well short of that goal. Trump started the week by hinting that the U.S. and Iran were making progress towards a ceasefire but that was denied by Tehran. Now at the end of the week, Trump again extended a pause on strikes against Iran’s energy facilities into April.

The back and forth positive comments from Trump and denials from Iran are creating uncertainty, but the rally in the dollar is clearly saying that investors don’t think the situation in the Middle East is even close to a peaceful resolution.

10,000 More Troops and No End in Sight

Supporting the notion that the end of the war isn’t imminent, the Wall Street Journal is reporting that the Pentagon is planning on sending up to 10,000 additional ground troops to the Middle East. Comments from Trump, a hard stance from Iran, and stories like this from the Wall Street Journal are doing little to boost investor hope of imminent peace in the region. As long as there is a prolonged conflict, the dollar is likely to remain well-supported.

Fed Rate Hike Bets Are Adding Fuel to the Dollar

Safe-haven buying isn’t the only factor keeping the dollar on pace for a more than 2% gain in March, its biggest monthly gain since July last year. The market is now pricing in a 46% chance of a 25-basis point rate hike by the Fed by the end of the year, according to the CME Fedwatch tool. This is a huge flip from more than 50 bps worth of easing priced in before the war started on February 28.

Dollar traders should keep an eye out for any headlines on a peace deal as well as the crude oil charts. Higher oil could fuel a global recession and prompt a broader monetary tightening cycle, setting up the dollar for volatile times ahead.

Technical Outlook

Technically, the U.S. Dollar Index (DXY) is being well supported by the bullish swing chart and solid trend line that has been guiding the market higher since January 27. The current three-day rally from the 98.880 swing bottom has put the index in a position to challenge the monthly high at 100.540. This top goes back to May 29 also, so taking it out with conviction could launch an extended rally to the May 12 top at 101.977.

The major support is the zone formed by the 200-day moving average at 98.400 and the 50-day moving average at 98.219. DXY could get jolted to the upside if the 50-day MA crosses to the strong side of the 200-day MA.

More Information in our Economic Calendar.