Is the DXY surge over? Traders brace for some profit-taking

The US dollar surged in April, as reflected by the DXY chart below. The index tracks the dollar’s performance against a basket of currencies, such as the euro, the British pound, or the Japanese yen.

The euro has the biggest weight in the index, and, perhaps, it is the reason why the Dollar index advanced so much this April. However, the dollar gained the most against the Japanese yen as the Asian currency melted on the back of the Bank of Japan is doubling down on its easing measures.

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Because today is the month’s last trading day, we may see some profit-taking. In any case, with or without profit-taking, the DXY’s surge is nothing short of impressive.

This is the world’s reserve currency, and a stronger US dollar affects the entire world. Moreover, the Fed is preparing to hike the rates next week, possibly even by 50bp, adding more fuel.

When the Fed hikes the rates, it literally does it for the entire world. Moreover, because most of the debt is denominated in US dollars, a stronger dollar impacts all economies.

All eyes are on the 100 level

Every now and then, markets reach round numbers. For whatever the reason, they act as pivotal levels, probably because most traders set their stop-loss and take-profit levels nearby.

In the DXY’s case, we see a consolidation in March just below the 100 level. After the index broke higher in April, it did not look back anymore, trading close to 104. Moreover, the round number acted as support once, so traders should expect it to do so again in the future.

The Fed holds the key

Next week’s Fed meeting looms large. The Federal Reserve is in a tough place because the economy shrank in the first quarter of the year, and inflation is above 8%.

As such, it might end up hiking the rates into a possible recession, damaging the economic growth further. Therefore, the Fed may deliver a bit of a dovish hike on Wednesday, but it is clear that it cannot let inflation run much higher.