US Dollar Forecast: DXY Falls as Ceasefire Lifts Risk, Fed Cut Bets Rise

Dollar Gaps Lower as Ceasefire Kills Safe-Haven Demand

The U.S. Dollar gapped lower against a basket of major currencies on Wednesday, dropping the index to its lowest level since March 10. The sell-off may have been telegraphed on Tuesday after the market closed on the weak side of a long-term trendline at 99.931 today.

At 09:25 GMT, DXY is trading 98.862, down 0.654 or -0.66%.

Technical Outlook

The steep sell-off has the index heading toward a test of the 200-day moving average at 98.567 and the 50-day moving average at 98.479. This is an important area on the chart. Not only can we see buyers come in to produce a technical bounce, but a failure at this support cluster could trigger an acceleration to the downside.

Trend watchers should note that breaking the trend line and crossing two swing bottoms at 99.298 and 98.880 changed the trend to down. This means that any buying at the moving averages will be counter-trend.

The main trend range is 95.551 to 100.643. Its 50% to 61.8% retracement zone at 98.097 to 97.496 is another potential downside target. Buyers could also step in on a test of this level if they believe the index is oversold.

Fear Trade Unwinds Fast After Ceasefire News

The ceasefire flipped the switch on safe-haven demand and the dollar is paying for it. Investors don’t need the dollar when fear is leaving the market. They want stocks and foreign currencies and that’s exactly where the money is going right now.

The euro, pound and yen all jumped hard against the dollar. When you see that kind of broad strength across the majors at the same time, that’s not a short-term reaction. That’s repositioning.

Oil prices are also playing a role. With the ceasefire reducing the risk of supply disruption through the Strait of Hormuz, oil dropped sharply. Lower oil prices reduce inflation pressure, which in turn affects expectations for central banks.

Rate Expectations Adding to the Pressure

Oil dropping hard is changing the rate picture too. Less inflation pressure means the Fed has more room to move and traders are starting to price that in. Right now there’s about a 50% chance of a rate cut by year end being priced into the market. That’s not good for the dollar. Lower rates mean lower returns on U.S. assets and money goes elsewhere.

Europe is moving in the opposite direction. Rate hike expectations are still on the table over there and that’s putting a bid under the euro at the dollar’s expense.

Risk appetite is back, the rate outlook is shifting and five weeks of defensive positioning is getting unwound all at once. That’s a lot of selling hitting the dollar at the same time.

More Information in our Economic Calendar.