US Dollar Forecast: DXY Rebounds from Retracement Zone, Eyes Countertrend Rally

U.S. Dollar Index Steadies Near Multi-Month Lows

The U.S. Dollar Index (DXY) is edging higher Thursday but barely. It’s sitting near its weakest level since early March and the bid doesn’t have much conviction behind it. Traders are watching the Middle East. Hopes for a U.S.-Iran deal are keeping safe-haven demand out of the dollar and that’s where the pressure is coming from.

Yields, Fed Policy and the Political Noise

Risk sentiment is the main driver today. When fear leaves the market, money moves out of the dollar and into other currencies and riskier assets. Trump suggested the conflict could end soon and that added to the optimism. Iran’s mixed signals are keeping traders from committing either way.

The rate picture is muddled. The 2-year U.S. Treasury yield edged lower while longer-term yields moved slightly higher. Lower short-term yields reduce the return on U.S. assets and that weighs on the dollar. Traders are also waiting on jobless claims. A strong number keeps rate cut expectations in check and gives the dollar some support. A weak one does the opposite.

Jerome Powell is dealing with political pressure and that’s adding another layer of uncertainty. When the Fed’s independence gets questioned, confidence in U.S. policy direction takes a hit. The dollar feels that.

Euro and Pound Holding Near Recent Highs

The euro and British pound are both near recent highs as risk appetite holds up. The Japanese yen is stable with safe-haven demand limited. Foreign buyers aren’t rushing into dollars right now. They have better options.

Technical Outlook

Technically, the U.S. Dollar Index caught a bid at 97.832, inside the January to March retracement zone at 98.097 to 97.496. Crossing 98.097 indicates the presence of light buying, perhaps just enough to challenge the 200-day moving average at 98.518 and the 50-day moving average at 98.698.

It’s a breakout over 98.698 that could draw the attention of stronger buyers with a move over the swing top at 99.183 likely triggering an acceleration to the upside.

On the downside, the inability to sustain a move over 98.097 will likely lead to a full break into the 61.8% level at 97.496.

Traders have found the value zone on the chart and short-sellers are taking profits, whether it will be enough to fuel a short-covering rally, we should find out in a few days. However, with the trend down, if you miss the rally, wait for another lower top because the market is in sell the rally mode.

More Information in our Economic Calendar.