US Dollar technical analysis: USD tries to turn the tide

US Dollar Talking Points:

• The month of March brought a quick injection of fear to global markets as banks in the US started to come under pressure, seemingly suffering from interest rate risk gone awry.
• Bank earnings have helped to pull some optimism back into the fray and US data continues to indicate some element of strength, reiterated again in the PMI report on Friday morning which has helped to push US rates higher. The US Dollar put in a net loss on the weekly chart for five consecutive weeks after the banking crisis came into the picture. This week sees DXY attempting to hold on to a weekly gain for the first time since that early-March reversal.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

As questions continue to percolate around the Fed’s hiking policy and how long it will run, the bank has continually said that they were going to hike rates until either inflation was back to the 2% target or until ‘something’ breaks. Inflation remains far away from that 2% target by most measures but in the month of March another item popped up that all-of-the-sudden gave market participants hope that the Fed may soon soften their approach, and this was an item that otherwise was absent of hope as we started to see worries about the banking sector in the United States. This was further illustration of the ‘bad is good’ theme that became commonplace in the post-GFC backdrop, when economic weakness kept the door open for a heavier hand from the central bank.

The premise that the Fed may stop hiking and start cutting helped to provide a jolt of hope to risk markets with US equities quickly rushing up to resistance as rate cuts started to price-in and US Treasury rates started to tilt-lower. That theme ran into the end of Q1 and even through the initial portion of Q2. But as we started to sift through bank earnings to see that the damage didn’t appear all too bad, at least from the perspective of market participants as gauging price action in bank shares.

That has helped US rates to come back as markets begin to price-out those cuts that were quickly getting priced-in last month. At this point there is still a median expectation for the Fed to have cut rates by the end of the year, but this is quite a bit less than what was showing a month ago. Last month there was a 86.2% probability that rates would be lower by the end of the year. As of this writing, that probability is down to 67.3%. More telling is the degree of cuts that were starting to get priced in, as a month ago showed a near 20% probability of 75 bps of cuts from current rates, or 100 bps of cuts if we get the 25 bp hike that’s expected in May.

US Target Rate Probabilities for December FOMC, per CME Fedwatch

Market Rates

Aside from expectations around the Fed there was a fast dynamic of re-pricing in US Treasury rates. On the below chart of the 10 year note yield, I’ve highlighted March 9^th, or the day when banking worries started to get priced-in to US markets. Notice how yields took a fast swan dive down the 3.3% marker before finally starting to turn higher in the first week of April, as we started to see those bank earnings reports.

US 10 Year Note Yield – Indicative Only – Not available on Forex.com platforms

US Dollar Support

As rates began to fall on the back of worries around banking, the US Dollar similarly reversed a previously bullish move. The currency had bounced from the lows established in early-February, with a jolt around the NFP report earlier in the month that showed an addition of 517k jobs to US Non-farm payrolls. That trend ran all the way until DXY perched above the 105.00 handle and at the time it looked as though there could be continuation potential, helped along by possible breakdown potential in EUR/USD.

But, as rate expectations got hit, so did the USD, and this was happening as the ECB retained a fairly hawkish outlook which further helped to reverse those prior USD gain.

The Dollar continued to slide all the way until running into that same support from early-February, plotted at 100.87. That came into play last Friday, and then led to an outside bar on the daily chart which isn’t quite a bullish engulfing formation but has similar characteristics. That did lead to topside continuation on Monday of this week but there was little follow-through after, with support attempting to hold a higher-low above last week’s swing.

US Dollar - DXY Daily Price Chart (indicative only, not available on Forex.com platforms)

USD Longer-Term

Taking a step back to the weekly chart highlights a possible double bottom formation. Double bottoms are often tracked with the aim of bullish reversals but to come to fruition, price must breach the neckline, or the high between the two lows, before triggering the setup. The neckline for the formation in this case would be the swing-high from March 8^th, just before the entrance of worries around banking, and that plots all the way up at 105.88. So there would be some work to be done on the part of bulls to make this scenario a reality. But, the first step for any bullish reversal is for the sell-off to quell and that may be what we’re seeing here.

Notably, this week’s candle on DXY is attempting to hold on to a gain from that Monday breakout but, if the weekly bar closes in the green this would be the first weekly gain for the DXY since the entrance of banking worries in early-March.

US Dollar - DXY Weekly Price Chart (indicative only, not available on Forex.com platforms)

For USD Strength – EUR/USD Weakness

I had talked about this topic yesterday in regard to the EUR/USD pair, but given the fact that the Euro is a whopping 57.6% of the DXY quote, for the USD to put in a turn it’s likely going to need at least some help from the Euro and particularly the EUR/USD pair.

And this week showed a resistance hold at a really big spot on the chart, the same that I had warned about coming into the month around the 1.1000 handle. This zone has since helped to hold the highs although bears haven’t yet been able to do much with it.

But, from a technical perspective there may be some potential for that theme as recent EUR/USD price action has taken on the form of a rising wedge, often approached with the aim of bearish reversals. If that begins to come to fruition over the next couple of weeks, the bottoming theme in the US Dollar will likely be much more attractive which can raise the prospects of that longer-term double bottom formation filling in.

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

--- written by James Stanley, Senior Strategist