US Dollar Forecast: DXY Holds Firm as Yields and Iran Risk Support the Bid

U.S. Dollar Index Holds Firm but the Trend Is Still in Question

The U.S. Dollar Index is up slightly Tuesday but do not read too much into it. DXY is pinned between the 50-day and 200-day moving averages with the main trend down and the minor trend neutral. This market is waiting for a reason to move and it has not found one yet.

Technical Outlook

The U.S. Dollar is edging higher against a basket of currencies on Tuesday but the move is offering little insight into the direction of the near-term trend. Right now, our swing chart analysis is saying the main trend is down and the minor trend is neutral.

At 15:30 GMT, DXY is trading 98.654, up 0.157 or +0.16%.

The moving averages show a mixed to lower picture with DXY clearly on the weak side of the 50-day MA at 98.926, but straddling the 200-day MA at 98.532. The tightness of the gap between the two suggests impending volatility, but the immediate direction is unknown.

Since mid-April, DXY has shown strong respect to the long-term retracement zone at 98.097 to 97.496. In fact, the low for the month at 97.632 fell inside this zone. Traders have also showed respect for the short-term retracement zone at 99.138 to 99.493.

Since DXY is currently trading in the middle of the retracement zones, our focus is going to be on the moving averages, which appear to have the same characteristics as pivot. I think a sustained move over the 50-day MA at 98.925 will create upside momentum and a move over 99.493 will trigger an acceleration to the upside. At the same time, I see a bearish tone developing under the 200-day MA at 98.532 with 98.097 the first target and 97.496 the major support and potential trigger point for an acceleration to the downside.

Yields Are Running This Trade

The 10-Year U.S. Treasury yield is up near 4.36% and the 2-year is pushing around 3.83%. That spread is doing the work. Rising yields pull money into U.S. assets and that flow supports the dollar. The 2-year matters most right now because it tracks Fed policy directly. At 3.83% it is telling you the market is not pricing in cuts anytime soon.

The Fed holds rates in the 3.50% to 3.75% range at the end of this meeting and traders are not reading that as a dovish signal. Higher-for-longer keeps yields supported and yields keep the dollar bid. That is the whole trade right now and nothing on Tuesday changed it.

Iran Uncertainty Adding a Safe-Haven Bid

The Iran situation is not resolved and traders know it. When risk stays elevated this long without a clear resolution, the safe-haven flow into the dollar does not go away. It sits underneath the yield story and adds a second layer of support. DXY does not need both drivers firing at full strength to hold its ground. Right now it has both.

The way I see it, a sustained move over the 50-day MA at 98.926 is the trigger for upside momentum. Under the 200-day MA at 98.532 and the bearish case starts building toward 98.097 and then 97.496. Until one of those levels breaks, this market is range-bound and the moving averages are the pivots to watch.

More Information in our Economic Calendar.