The decline in DXY: The DXY index has seen a recent decline, trading at around 105.125, primarily due to the strengthening of the euro and a weaker yen. The euro’s rise was driven by the results of France’s parliamentary elections, which alleviated concerns over aggressive fiscal policies and boosted European stocks and bonds (FX Empire).
Impact of US Inflation Data: Recent US inflation data showed a cooling trend, reinforcing expectations that the Federal Reserve might cut interest rates later this year. This has led market participants to price in a higher probability of a rate cut in September (FX Empire) (Nasdaq).
Strong Economic Data and Treasury Yields: Strong US economic data, such as higher business activity and durable goods orders, have reduced expectations for imminent rate cuts, driving up Treasury yields. The DXY is poised for its largest weekly gain in over a month due to these robust economic indicators (FX Empire).
Federal Reserve’s Stance: Despite robust economic indicators, the Federal Reserve officials have maintained a cautious approach towards rate cuts, emphasizing the need for more conclusive evidence of inflation cooling. This has created uncertainty in the market regarding the timing and frequency of interest rate adjustments (Nasdaq) (FX Empire).
Technical Analysis
Trend and Moving Averages:
- The DXY is currently trading at $105.140, above the 50-day SMA ($104.419) but below the upper Bollinger Band ($106.650), basically in a consolidation with slightly higher highs and lows.
Bollinger Bands:
- The Bollinger Bands are relatively tight, so the volatility compared to earlier periods is lower. This normally leads to a breakout as price acts like a coil or spring ready to break.
RSI (Relative Strength Index):
- The RSI is at 53.00, which is in the neutral zone. This confirms the consolidation phase and doesn’t give us much indication of direction in the near term. Keep in mind that if we see a break in either direction, we would likely see the RSI attempt overbought (or oversold) twice before retracing. This often happens when the RSI has been consolidating.
MACD (Moving Average Convergence Divergence):
- The MACD is slightly positive, with the MACD line at 0.352 and the signal line at 0.361. The histogram shows minimal difference, indicating a lack of strong momentum in either direction.
Support and Resistance Levels:
- Resistance: Key resistance levels are at $107.326 and the previous high near $114.789 (ATH).
- Support: The key level for support is the ascending trianlge formation at the moment around $102.5 which is also around the lower level of the bollinger band.
Impact on U.S. Equity Markets
Strengthening DXY:
- A stronger dollar makes U.S. exports more expensive and less competitive abroad, potentially hurting multinational companies’ earnings. However, it can also indicate investor confidence in the U.S. economy, which might bolster domestic-focused companies and sectors.
Weakening DXY:
- A weakening DXY suggests a weaker U.S. dollar, which generally benefits U.S. exporters as their goods become cheaper and more competitive internationally. This can boost the earnings of multinational companies, positively impacting their stock prices. Conversely, it might signal concerns about the U.S. economy, which could weigh on investor sentiment and equity valuations.
Volatility in DXY:
- Increased volatility in the DXY often leads to increased volatility in the equity markets. Traders and investors might move to hedge their positions, leading to sharper movements in stock prices. Stability in the DXY, on the other hand, tends to promote a more stable equity market environment.
Conclusion
The Dollar remains in a consolidation phase. Moving forward, watch the support and resistance levels mentioned above, it will be important for equity markets if trading futures. If DXY chart goes up know that equities could be more expensive because they are priced in Dollars. If DXY falls, equities could rally but it depends on the economic and geopolitical landscape because it could send shocks everywhere.
