The US dollar index (DXY) retreated for the third straight day as traders adjusted their view of the Federal Reserve. It retreated to a low of $104, which was much lower than last week’s high of $105.91. Focus now shifts to the upcoming US inflation data scheduled for Tuesday.
Fed to take a reflective tone
The US dollar index rallied last week after Jerome Powell reiterated that the Fed will continue hiking interest rates. Following his statement, analysts started to price in a situation where the Fed hikes interest rates by 0.50% this month.
Things have changed dramatically in the past few days. The collapse of several banks, including Silicon Valley Bank, Signature, and Silvergate, has pushed analysts to change their tune on what the bank will do.
In a note, analysts at Goldman Sachs noted that the bank will likely not increase interest rate at all next week. Instead, they expect that the bank will pause on hikes as it assesses the impact of these bank collapses on the economy.
Analysts at JP Morgan, on the other hand, expect that the Fed will deliver a 0.25% rate hike next week. In a note, analysts at ING said that the Fed will hike by 0.25%. They wrote:
“Market angst regarding SVB and potentially others is unlikely to disappear. If that’s the case a 25bp move would make more sense, especially given monetary policy operates with long lags.”
The DXY index will next react to the upcoming US inflation data scheduled for Tuesday. Economists expect that inflation dropped slightly to 6.0% in February. My crystal ball believes that inflation remained much higher in February.
The other catalyst will be the action of the European Central Bank (ECB) scheduled for Thursday. Like the Fed, the ECB will likely take a more cautious tone in this meeting.
US dollar index forecast
The 4H chart shows that the DXY index has been in a strong bearish trend in the past few days. It managed to cross the important support at $104.08, the lowest level on March 1. The index has also moved below the 25-day and 50-day moving averages. The two averages have actually made a bearish crossover.
Meanwhile, the US dollar index has moved to the oversold level of the Murrey Math Lines. Therefore, it will likely move to the extremely oversold level at $103.51 and then retest the key resistance level at
Source: https://invezz.com/news/2023/03/13/us-dollar-index-dxy-gets-oversold-murrey-math-lines/