Forex Analysis: US Dollar Index
Most of the US dollar index is composed of the euro, so we tend to look here first for clues about the outlook for the greenback and the other major crosses. As a result of the Macron win, the euro had a brief respite with an early 1.0850 print, which proved to be a complete shakeout, trapping early traders long during the overnight session. And then this morning the market was expecting negative data from Germany’s Ifo survey but got caught out as this data point came in better than expected with a 91.8 print. It should come as no surprise, then, if the euro rises during the US session.
After having dropped to new 2022 lows, the EURUSD is beginning to exhibit some signs of instability. This suggests the risk is still skewed to the downside and calls for parity are still valid. Based on sentiment readings on the ActivTrader platform, 75% of participants are long the EURUSD, so fading any rips is my base case scenario. I am almost expecting the recent range between 1.07570 and 1.09228 to serve as a strong resistance but open to the idea we could poke back inside that range.
Although it is not advisable to chase the move at current levels, the Ifo data could be sufficient to send the EURUSD back towards that previous day’s high before a more significant drop occurs. The target range should be from 1.0800 to 1.0850 with a stop placed above 1.0920.
The more the sentiment indicator gets skewed to the bearish side, the higher the probability of the US dollar index (DXY) touching the 102 and then the 2.618% Fibonacci extension to complete the 5-wave impulsive move to the upside.
The other main driver to the bullish US dollar is the US 10-year yields, which are approaching 3% and the long-term inflation outlook. Real yields have also touched the parity line and poked into positive territory at the end of last week, so there is a real move into safe havens and the US dollar occurring currently, as the market starts to believe the Fed will go through with their ultra-hawkish rate hike cycle and bring on a hard landing and recession.