The US Dollar Index (DXY) is a powerful tool for traders and investors alike, providing a snapshot of the value of the US dollar against a basket of major currencies. But understanding the factors that drive the index can be a complex and challenging task. From economic indicators and geopolitical events to interest rate policies and global market trends, there are a myriad of factors that can impact the value of the dollar.

In the first half of 2021, the DXY established a significant base and witnessed a subsequent rally, reaching a high of 114.75 in September of the same year. This technical note examines the technical setup of the DXY, highlighting its recent rebound and potential resistance levels. Additionally, we explore other factors, including the impasse over the US Debt Ceiling and contrasting economic performances between the United States and Germany, that have influenced the strength of the Dollar Index.

Technical Analysis: Establishing a Base and Rebound

Analyzing the weekly charts of the Dollar Index reveals an intriguing pattern. After reaching its peak at 114.75 which was seen in the second half of 2022, the DXY underwent a retracement phase, ultimately forming a double-bottom support at 100.80. This retracement found support at the 100-week moving average (MA), leading to a rebound. Based on this technical setup, the DXY has the potential to test the resistance level of 105.75, which aligns with the 50-week MA. These levels serve as crucial indicators for traders and can significantly impact short-term movements in the Dollar Index.

Short-Term Indecisiveness and Key Support

Examining the daily charts, we observe that the DXY is currently experiencing an upward movement. However, the formation of a Doji Candlestick pattern suggests indecisiveness in its short-term trajectory. A breakthrough above the 105.75 level would inject further strength into the Dollar Index. Conversely, the level of 100.80 remains a vital short-term support level, providing major support in case of any volatile price fluctuations.

Contributing Factors: US Debt Ceiling and Economic Data:

Aside from the technical setup, several factors have influenced the strength of the Dollar Index. One of the contributing factors is the recent impasse over the US Debt Ceiling. The uncertainty surrounding this issue has created additional support for the US Dollar, as investors seek safe-haven assets amidst concerns of a potential US default.

Furthermore, recent economic data from the United States has played a role in bolstering the Dollar Index. Reports indicate that weekly initial jobless claims rose slightly by 4,000 to reach 229,000. Additionally, the second estimate of first-quarter gross domestic product (GDP) growth confirmed a slower rate of expansion, albeit revised upward to 1.3% from the initial 1.1%. These figures suggest that the anticipated recession forecasted for 2023 may not materialize, prompting a positive response in the market and keeping interest rates on an upward trajectory, thereby contributing to the buoyancy of the Dollar Index.

Contrasting Economic Performances: Germany and the Euro:

In contrast to the United States, Germany, the largest European economy, experienced a recession in the first quarter of the year, with GDP declining by 0.3%. This economic downturn resulted in a weakening of the euro, which subsequently propelled the Dollar Index to a two-month peak. The diverging performances of these two economic powerhouses further supported the strength of the Dollar Index.

Conclusion: Assessing the Dollar Index’s Outlook:

Considering the technical setup and the various contributing factors discussed, it becomes evident that the Dollar Index currently finds strong support at 100.80. Although it may encounter significant resistance at 105.75, a substantial breakthrough at this level would reinforce its strength and potentially trigger further upward movement. Traders and investors should closely monitor the upcoming Fed meeting in June, as the probability of a 25 basis point rate hike stands at approximately 53%. A potential pause in rate hikes may result in a minor retracement of the Dollar Index from its current levels.

Foram Chheda, CMT