Trade Of The Week: Are Dollar Bulls Getting Tired?

The past few days have been rough for the dollar.

It has weakened against most G10 currencies since last Wednesday despite the Federal Reserve raising interest rates for the first time in more than three years.

The mighty dollar’s failure to rally on a hawkish Federal Reserve and updated “dot plot” that signalled another 6 rate hikes in 2022 points to signs of exhaustion for bulls. Given how the latest war-related headlines failed to cushion downside losses, bears could be lurking and ready to pounce down the road.

Federal Reserve policymakers project they will increase their benchmark rate to 1.875% by the end of 2022.

According to Bloomberg’s world interest rate probability model, markets have priced in 7 rates hikes this year.

The week ahead promises to be eventful for the dollar thanks to speeches from Fed policymakers, ongoing geopolitical developments, and key economic reports. It is also worth keeping a close eye on US President Biden’s meeting with European leaders at a NATO summit in Brussels on Thursday.

Before we discuss how these factors and themes could influence the dollar's trajectory, it is worth keeping in mind that March has been a mixed month for the dollar thus far. However, it is a different story year-to-date with the greenback still maintaining some grip on the FX throne.

In regards to the technical picture, the Dollar Index (DXY) may be entering a range on the daily charts with support at 97.80 and resistance at 99.40.

Looking at the equally-weighted USD Index, prices are wobbling above major support at 1.1080 on the weekly charts.

The week ahead…

Jerome Powell hijacked the spotlight on Monday afternoon as his hawkish comments injected life into markets. He stated that the Fed will take the “necessary steps” to get inflation down even if it means aggressively raising interest rates. According to a report on Bloomberg, investors are now pricing a more than 50% probability that the Fed will hike interest rates by 0.5 bps in May. Raphael Bostic, president of the Atlanta Fed also made a speech, stating that he supported just five more interest rate increases this year.

On Tuesday, New York Fed President John Williams is scheduled to make a speech. Fed Chair Powell will be back under the spotlight on Wednesday.

Thursday could be a volatile day for markets as Joe Biden attends an emergency NATO Summit on Ukraine as well as a G7 meeting. The conflict between Ukraine and Russia continues to sap investor confidence and fuel concerns over the global economy. There is a thick smog of uncertainty created by the military conflict with fears of further escalation leaving investors on edge. If tensions escalate, this could send shockwaves across global financial markets, sending investors rushing towards safe-haven destinations like the dollar.

Should the emergency NATO meeting conclude on a positive note and revive optimism about peace talks between Russia and Ukraine, this could drag the dollar lower as risk-on returns.

Dollar breakdown on the horizon?

Watch this space as the equally-weighted USD Index could be gearing up for a major breakdown.

Prices are trading below the 50 and 100 SMA but still above the 200-day SMA while the MACD trades to the downside. A solid breakdown below the 1.1080 support level could encourage a decline towards 1.0950 and 1.0800, respectively.

Should 1.1080 prove to be reliable support, a rebound back towards 1.1300 and 1.1360 could be on the cards.

Zooming out to the weekly timeframe, the weekly bullish trend could be invalidated if prices trade back under the 1.0950 higher lower. A decline below this point could open the doors towards 1.0780.

USD DXY FED Dot SMA BIDEN NATO Geopolitics MACD