DXY eyes break and retest pattern

The US dollar index retreated on Monday as constituent currencies retreated. DXY is trading at $102.30, which is about 2.16% below the highest level this year. It still remains about 8.12% above the lowest level in 2022.

Stronger euro drags the USD

The US dollar index declined, partly because of the relatively strong euro. The closely watched euro index rose by more than 1% after Christine Lagarde wrote an extremely hawkish blog post. 

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In it, Lagarde noted that monetary conditions in the euro area were changing rapidly as consumer and producer prices surge. This shift in tone has pushed many officials of the bank to change their outlook for the economy. 

As a result, she now believes that the bank will start lifting interest rates in its July meeting and then exit negative rates in September. She added:

“But the speed of policy adjustment, and its end point, will depend on how the shocks develop and how the medium-term inflation outlook evolves as we move forward.”

The statement came at a time when other ECB officials have made similar hawkish statements. The Dutch central bank governor has suggested that a 0.50% rate hike will be needed in July. Similarly, the head of the German’s Bundesbank has said that a rate hike will be necessary.

The US dollar index is usually highly sensitive to the performance of the euro. Besides, euro accounts to more than 50% of the index.

Meanwhile, the greenback has declined against other currencies as well. It fell against the British pound, Swiss franc, Japanese yen, and Canadian dollar. 

The next major catalyst for the DXY index will be the upcoming statement by Jerome Powell that is scheduled on Tuesday. Also, the FOMC will publish minutes of the past meeting. 

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bullish trend in the past few weeks. As it rose, the index moved above the ascending channel that is shown in green. The index is now attempting to retest the upper side of this channel. It has also moved below the 25-day moving average while the Stochastic Oscillator has moved to the oversold level.

Therefore, the dollar index will likely keep falling as bears target the key support at $101. On the flip side, a move above the resistance point at 103.45 will signal that there are still more buyers around.