US Dollar Forecast: DXY Breaks Higher on Middle East Tensions, Fed Outlook

Dollar Tests Key Resistance at 50-Day MA and 61.8% Level

The U.S. Dollar Index is higher at the mid-session on Thursday, but struggling a bit as we head into the close after touching both 50-day moving average resistance at 97.981 and 61.8% resistance at 97.987. The actual high for the session is 98.074.

Short-Covering, New Buying, or Both?

Now comes the tricky part. Does it have enough buying power behind it to extend the rally beyond the 50-day MA and into the 200-day MA at 98.441? With so many bashing the dollar and calling for its demise, is this rally being fueled by short-covering, new buying or a blend? Some are claiming the dollar is being supported by safe-haven buying because of the simmering tensions in the Middle East, fair enough. In my opinion, traders are reacting to the odds of a rate cut and the Fed minutes.

The Chart Tells the Story—Bottom at 95.551 Was the Fed Meeting Day

If you take a look at the daily chart, you’ll see the index bottomed at 95.551 on January 27, the first day of the January Fed meeting. The subsequent surge to 97.973 on February 6 reflects investor reaction to the monetary policy statement, interest rate decision and Fed Chair Powell’s comments after the meeting.

Technical resistance and an overreaction to the results of the Japanese election may have fueled the sharp break on February 9, but then the market consolidated from February 10 to February 13 as traders assessed the U.S. Non-Farm Payrolls and consumer inflation reports. Buyers bought aggressively on Thursday in reaction to the events in the Middle East and the hawkish Fed minutes, extending the rally on Friday.

Reclaiming 200-Day MA Could Change Entire Dollar Narrative

I think we’re looking at a potentially bullish formation. If buyers can reclaim the 200-day moving average, the index would have a clean shot at the January 15 top at 99.492 then the November 21 top at 100.395. The latter is the major top that, if taken out, could change the entire narrative calling for a lower dollar.

DXY May Be Forming a Textbook Bottom Pattern

Technical analysis shows DXY may be forming nearly a textbook bottom. From a prolonged move in terms of price and time, a market will hit support, triggering a fast short-covering rally equal to 50% to 61.8% of the last break. After the weakest shorts are cleared out, the market will make a 50% to 61.8% correction of the first leg up. If it turns in this zone then this will tell us that new buyers are entering. If the buying is strong enough then the trend will change to up when the first retracement top is taken out with conviction.

Breaking 98.074 Could Trigger Rally to 98.916 by Monday or Tuesday

On the daily chart it looks like this. First sell-off 99.492 to 95.551. First short-covering rally, 95.551 to 97.973. The next pullback was 97.973 to 96.494. Buyers came in because they had a lean at 95.551. This launched the rally to 98.074 today. Taking out this level with conviction could trigger a rally to 98.916 by Monday or Tuesday if it follows the same swing pattern.

More Information in our Economic Calendar.