US Dollar Forecast: DXY Retreats as Jobs Report Overshadows Geopolitical Rally

U.S. Dollar Retreats From Session High as Geopolitical Rally Fades

The U.S. Dollar Index is trading higher on Monday, but has given back nearly all of its gains. Safe-haven buying earlier in the session spiked the greenback to 98.861, its highest level since December 10. But since that early gain, prices have retreated to the low of the session at 98.471. At 15:38 GMT, DXY is trading 98.523, up 0.097 or +0.09%.

Key Resistance Cluster Caps Rally Attempt

Helping to cap the gains was a resistance cluster, formed by the 200-day moving average at 98.256, a 50% level at 99.072 and the 50-day moving average at 99.090. Although the market didn’t actually touch these levels, the fact that the rally stalled at 98.861 demonstrates that bearish traders were defending against a breakout rally.

A lower close today would put the index in a weak position with 98.307 to 97.814 the next major downside target.

Venezuela Crisis Sparks Initial Dollar Strength

Fundamentally, some of today’s initial thrust was triggered by U.S. military action against Venezuela over the weekend and President Trump’s threats against Colombia and Mexico. While this is an intriguing geopolitical backdrop, the price action suggests the rally is unsustainable, given the current outlook for monetary policy. Furthermore, it is highly unlikely that traders would take an aggressive long position in the dollar ahead of Friday’s U.S. Non-Farm Payrolls report.

Analyst: Macro Data Will Override Geopolitical Events

In light of today’s early volatility, Jeremy Stretch, head of G10 FX Strategy at CIBC Markets said, “Whilst we see that geopolitical risk, I think we shouldn’t be stuck on it. Soon, we’ll come crashing back into the reality of macroeconomics, because there is a slew of U.S. data through the course of this week.”

“Often, the case is that the first move in terms of currency reaction to a big event is often the wrong one. And I’m not saying it’s the wrong move, but I think in a sense, this dollar rally could prove to be susceptible to a correction if we were to see signs of fragility in the employment data,” he said.

Economic Data Takes Priority Over Geopolitical Tensions

Today’s price action clearly shows that dollar traders are putting the economy over geopolitical events. This week’s slew of economic data should give traders enough information to determine the Fed’s next move on interest rates.

December Low at $97.749 Back in Focus

On the day before the Fed rate cut on December 10, the DXY hit 99.312 and hasn’t looked back, even falling all the way back to 97.749 on December 24 before embarking on a six-session short-covering rally.

The dollar appears to be ready to test that low again if the jobs data this week confirms more aggressive easing by the Fed.

More Information in our Economic Calendar.