Dollar could rebound as DXY tests major support

The US dollar fell sharply against the yen on the back of the BoJ surprise, but it has managed to hold its own relatively better against other currencies in what has been a quiet week in FX outside of Japan so far. Interestingly, the Dollar Index (DXY) has now arrived at a massive technical support area and with all the major central banks out of the way, I would not be surprised if it bounced here, setting the stage up for another bullish run.

Before discussing the macro reasons as to why the dollar might rebound, let’s have a quick look at the weekly chart of the DXY:

The above weekly chart is showing the index is testing the high of 2017 around 103.82. Below this level we have the 2020 high at 103.00. So, the area between 103.00 to 103.82 represents a massive support zone, which had previously been resistance.

In case you are not aware, the DXY is a weighted geometric mean of the greenback's value relative to following currencies:

EUR (57.6% weight)
JPY (13.6% weight)
GBP (11.9% weight)
CAD (9.1% weight)
SEK (4.2% weight)
CHF (3.6% weight)

Given the large weighting against the euro, a lot depends on the direction of the single currency. But the Japanese yen, British pound and Canadian dollar can all have an influence on it too.

So, if you are bullish the Dollar Index, you are most likely bearish the EUR/USD, and vice versa. The EUR/USD, GBP/USD and commodity dollars could all fall back if sentiment towards risk remains subdued.

Though there is some optimism in the air that US inflation has peaked, this alone might not be enough to keep investors optimistic for too long. We are continuing to see signs that world’s largest economy is heading towards a recession, as indicated for example by the latest S&P Global PMI data released on Friday. In case you missed it, the services PMI fell to 44.4 from 46.2, while the manufacturing PMI slipped to 46.2 from 47.7. Last week we also saw the Empire State and Philly Fed Manufacturing indices, as well as US retail sales and industrial production all disappoint expectations.

Investors are also worried about the Fed and ECB potentially over-tightening their respective monetary policies, which could tip the economy into a recession that might otherwise be avoided. The Fed has projected that interest rates will rise to around 5.00-5.25% before hiking is paused, while the ECB President Christine Lagarde warned that “we should expect to raise interest rates at a 50 basis-point pace for a period of time.”

If concerns continue to grow about the health of the global economy, this should provide support for the safe-haven US dollar, with commodity dollars likely to be hit the hardest.

Meanwhile, the pound looks like it will struggle to rise further against a weak macro backdrop in the UK. What’s more, the split among the MPC has given rise to speculation that the rate increases might stop sooner than expected as high inflation in the UK continues to hurt pockets of consumers and weigh on business activity. The ongoing industrial actions across the UK are likely to hurt the economy further. Across the Atlantic, the Fed signalled that it wants to hike rates further so that the terminal rate is above 5% and keep it there until it is convinced that inflation is on a sustainable downward path towards its 2% target. This should keep the GBP/USD undermined, and the Dollar Index underpinned.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.