Trade Of The Week: Is The Dollar’s Advance Unstoppable?

The mighty dollar kicked off the week in a shaky fashion despite crossing above 105.0 last Friday, its highest level since December 2002!

Nevertheless, it has appreciated against almost every single G10 currency this month thanks to Fed hike expectations and risk aversion stemming from not only global growth concerns but ongoing geopolitical risks.

With the Dollar Index (DXY) hovering around levels not seen in 20 years and the fundamentals clearly in favour of bulls, the greenback could be primed to hit fresh two-decade highs in the week ahead. Given how the next few days are jam packed with economic US data and speeches from Federal Reserve officials, it may be wise to fasten your seatbelts due to increased dollar volatility.

Before we take a deep dive into what to expect from the dollar this week, it is worth keeping in mind that the DXY is heavily bullish on the daily timeframe. There have been consistently higher highs and higher lows with 105.0 acting as a key point of interest.

The same can be said for the equally-weighted USD index which is trading at levels not seen since mid-2020.

The week ahead…

On Tuesday, all eyes will be on the US April retail sales and industrial production data which could provide insight into the health of the largest economy in the world. This will be complemented by numerous speeches from Fed speakers including Federal Reserve chair Jerome Powell. If Powell and other policymakers strike a hawkish tone, this may fuel expectations around a 75-basis point rate hike in June – ultimately boosting the dollar.

Mid-week, Philadelphia Fed President Patrick Harker will be under the spotlight while on Thursday it’s all about the weekly initial jobless claims. Given how these speeches and economic reports could influence rate hike expectations, the next few days could be wild for the greenback.

Last week, U.S Treasury yields climbed to new cycle highs, powered by aggressive rate hike bets. Although yields have pulled back from multi-year highs, prices are still hovering around the 3% level and could push higher in the week ahead. Should yields resume their climb higher, this is likely to elevate the dollar.

Bulls remain in control for now…

Watch this space as the equally-weighted USD Index could be gearing up for another rally.

Prices are heavily bullish on the weekly and daily timeframe as there have been consistently higher highs and higher lows. Beyond 1.1850, the next key level of interest can be found at 1.2070. A solid breakout above 1.2070 could open the doors towards 1.2300.

Should 1.1850 prove to be reliable resistance, a decline back towards 1.1550 could become reality.

On the daily charts, we see a similar story with prices respecting a bullish channel. A breakout above 1.1950 could trigger a move towards 1.2070 and 1.2300. below 1.1850, bears may test the 1.1170 higher low before challenging 1.1550.

Dollar index Federal Reserve Bond Yields inflation