Where Is The US Dollar Headed?

by at Forex.com.
Joe Perry
Joe Perry

The US Dollar Index (DXY) has been in a freefall for the last month and the FOMC has done little to try and stop it. They made it abundantly clear at the last Interest Rate Decision meeting that the path of the coronavirus would dictate the direction of monetary policy.

This has led to their continued rhetoric that interest rates would be lower for longer.  In addition, bond buying will continue as needed, which is negative for the US Dollar.

The US Dollar Index (DXY) has been in a freefall for the last month, declining from 97.75 down to 92.50.

Recently, the DXY closed below the long-term weekly trendline dating back to May 2011. The RSI on the weekly is near 32, which is within neutral territory. Therefore, the weekly would indicate that there is still room for more downside and any bounces should be minimal.

US Dollar Index 7th Aug

Source: Tradingview, FOREX.com

On a shorter-term daily timeframe, the DXY has completed the minimum target for a flag pattern at the long-term weekly trendline (green) near 93.75. The target for a flag pattern is the distance of the flagpole added to the breakdown point from the flag.

However, this is only the minimum target! The RSI is diverging, which indicates the DXY may be ready for a short-term bounce in the longer-term downtrend.

US Currency Index 1D 7th Aug

Source: Tradingview, FOREX.com

If the US Dollar Index does indeed bounce, the first level of resistance is the upward sloping trendline (green) from the weekly timeframe near 94.00. Above there, horizontal resistance crosses at the March 9th lows near 95.07 and then the lows from June 10th near 95.72.

First support comes across at the recent lows near 92.50. There is a confluence of support near this level, as the 127% Fibonacci extension from the Mach lows to the March highs is 92.35.

Below there is horizonal support from February 2018 near 91.00, then the psychological round number at 90.00.

USD Currency Index 1W

Source: Tradingview, FOREX.com

As the virus continues to spread throughout the US, employment and manufacturing should remain low. The Fed will be prepared to act by providing stimulus to the markets.

This could cause the DXY to continue lower in the long-term. However, once a vaccine is created and proven for the coronavirus, the Fed will reverse course.

Deflation leads to inflation, which would ultimately be positive for the US Dollar. Markets generally turn before the Fed acts. Therefore, headlines on the coronavirus and vaccines should be closely monitored.

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