Dollar could be on the verge of a comeback

As we are heading towards the weekend, the dollar is beginning to come back to life again. A lot of investors and analysts were left scratching their heads after Wednesday’s dramatic moves in the markets as dollar reversed earlier gains to head lower despite the release of stronger-than-expected CPI inflation data. The greenback extended its losses on Thursday thanks to momentum selling, before bouncing back today.

While the selling gathered pace this week, market participants are fast running out of reasons to further press the dollar. After all, this week’s inflation data has further fuelled expectations that the Federal Reserve will raise rates more aggressively this year than had been expected. What’s more, the dollar looks severely oversold – at least in the short-term, anyway – which means even the bears might be helping to aid its recovery by means of profit-taking.

Granted, the bears could argue that the dollar is in a longer term downward trend because of rising demand for foreign currencies as the likes of the European Central Bank and the Bank of Japan begin preparing to normalise their respective monetary policies. Furthermore, they could point to the fact that the Fed’s projected rate hikes have been well-documented and so priced in. In addition, the dollar’s woes may also reflect in part concerns over the ballooning US debt levels and some loss of trust in the government.

However, taking everything into consideration, we think that the dollar looks undervalued at these levels and that it could make a comeback in the coming weeks, if not earlier. But do need to see a clear bottom pattern emerge to confirm the reversal.

In fact, the Dollar Index has again reached a massive area of support around 88.50. This level was major resistance back in the years 2008, 2009, 2010 and 2014, before the lift off late in 2014. Given the importance of this level, and the recent improvement in US macro data, we are now on the lookout for a potential bottom in the dollar. If the DXY does start to go back above last week’s low and hold there then the bears might get in trouble. For confirmation, I would like the DXY to clear previous support and resistance area around 91.05-91.92 before turning decisively bullish on the dollar. But the early signs are promising. Obviously if the DXY fails to turnaround here, then we would have to put out bullish views on hold again.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.