US Dollar Forecast: DXY Eyes Treasury Yields While Waiting for Catalyst; Volatility Looms

U.S. Dollar Closes Lower as Traders Watch Treasury Yields for Next Major Move

The U.S. Dollar Index closed lower on Wednesday as traders continue to navigate the 200-day moving average at 99.043 and the key retracement zone at 99.072 to 99.384 as they wait for a catalyst to drive the next major move.

On Wednesday, DXY settled at 99.058, down 0.116 or -0.12%.

Dollar Glued to Treasury Market Despite Multiple Geopolitical Catalysts

Despite a slew of possible catalysts in the news, dollar traders appear to be glued to the U.S. 10-year Treasury market for direction. Traders appear to be monitoring, but not reacting to the events in Iran, uncertainty over Venezuela, President Trump’s verbal attack on Fed Chair Powell that threatens the central bank’s autonomy, and milder than expected CPI and PPI data.

The 10-year yield at 4.136% is being compressed by the 200-day moving average at 4.233% and the 50-day moving average at 4.125%. The longer yields stay parked in a range, the greater the reaction to the breakout and consequently, the more volatile the next move in the U.S. Dollar.

Treasury Yields Pressured by Softer Inflation Data

Treasury yields were down on Wednesday, which may be the reason for today’s weakness in the dollar. Analysts said that yields were pressured by Tuesday’s CPI report and Wednesday’s PPI report. With yields hovering just above the 200-day moving average, Thursday could be the day they finally break through this support, taking the dollar lower.

Conflicting Forces: Fed Pause vs. Trump’s Attack on Powell’s Independence

As far as catalysts are concerned, the dollar has been trending higher since late December, but struggling to extend the rally this week as traders continue to evaluate Fed policy against other turbulence.

Supportive factors include the Fed’s current rate cut pause and rising geopolitical risks. The biggest risk at this time is Iran. As President Trump threatens to intervene on behalf of protesters, Tehran has warned it’s prepared to hit American bases.

Headwinds include concerns about Fed independence as Trump’s Justice Department undertakes a criminal investigation into Fed Chair Powell’s involvement in the central bank’s building renovation. Also on the table are worries about the Supreme Court ruling on Trump’s tariffs. An unfavorable ruling could sink the dollar, although Trump has alternative plans if the current ones are struck down.

Technical Analysis: Dollar Stalls in Retracement Zone—Breakout Imminent

Technically, short-covering has driven the index to the strong side of a pair of moving averages, but the rally has stalled inside the retracement zone at 99.072 to 99.384.

A trade back below the lower or 50% level at 99.072 will be the first sign of weakness, but the market will get progressively weaker if it falls below the 50-day moving average at 99.020, then the 200-day moving average at 98.769. The break of the 200-day could be the trigger that fuels a plunge into the major support zone at 98.307 to 97.814.

On the upside, a breakout over the Fibonacci level at 99.384 will signal the presence of buyers. This could trigger an acceleration with the November 21 top at 100.395 the preliminary upside target.

More Information in our Economic Calendar.