US Dollar Forecast: DXY Drops as ECB, BOJ Hold Policy, Fed Fails to Lift Dollar

Dollar Gets Hit Hard as ECB and BOJ Turn Hawkish

The U.S. Dollar Index (DXY) is sharply lower late in the session on Thursday after disappointing hawkish commentary from the European Central Bank (ECB). Hawkish remarks from the Bank of Japan (BOJ) also weighed. Surprisingly, U.S. Treasury yields were sharply higher, but dollar bulls didn’t bite on the move, instead choosing to focus on the heavily-weighted Euro.

A stronger Euro and Japanese Yen set the bearish tone for the dollar early in the session after their respective central banks held interest rates steady amid growing concerns from sharply higher crude oil prices in the wake of the seemingly escalating Middle East war between the U.S. and Iran.

Three Central Banks Held Steady and All Three Hurt the Dollar

The ECB started the rout on the dollar after it left its benchmark interest rate unchanged as expected, but said it would closely monitor the impact of surging oil prices on growth and inflation. The price action suggests investors were confident in the ECB’s decision in choosing to wait for the evidence instead of making a panic decision.

Meanwhile, at the BOJ, decision-makers also left interest rates unchanged, but maintained its bias for tighter monetary policy. Both moves were perceived as hawkish, sending the Yen over 1% higher against the greenback.

Over in the U.K., policymakers also voted unanimously to keep benchmark borrowing costs on hold due to inflation risks from the war in the Middle East. Even though they didn’t raise rates, its less-than-dovish outlook helped boost demand for Sterling.

The Global Theme Right Now Is Wait and See

With the first major central bank meetings since the war began on February 28, out of the way, the common theme appears to be “wait and see”. Holding policy steady effectively means they are staying the course for lower rates until they see how the war pans out and how long crude oil remains elevated.

Back in the states, on Wednesday, the Fed held interest rates steady and projected higher inflation, steady unemployment and a possible single rate cut this year. This offered some clarity to traders who were still looking for at least two rate cuts this year.

The Dollar Needs New Buyers Not Just Short Covering

The Fed’s stance helped rally the dollar on Wednesday, but it was not enough to fuel a breakout to the upside. The problem there is the dollar index is loaded with short-sellers, who have bent a little since the beginning of the year, but have not caved on the higher-for-longer interest rate outlook. I’ve said it before, I don’t trust a dollar rally that is being driven solely by technical signals, nor by short-covering. In order to establish a bona fide bull market, we need a combination of short-covering and new longs.

The Trendline at 98.796 Is Now in Play

Technically, the DXY is in an uptrend, but today’s sell-off has formed a potentially bearish secondary lower top. The current downside momentum has put traders in a position to challenge a major trendline at 98.796. We could get a technical bounce on the first test, but if it fails then look for the selling to continue into the 200-day moving average at 98.366 and the 50-day moving average at 98.175.

More Information in our Economic Calendar.