US Dollar’s Direction Hinges on Fed’s Policy Outlook, US Labor Market Data
Over the past week, the DXY index, which measures the value of the U.S. dollar, experienced a modest decline of approximately 0.10%, settling at 101.68. This decline can be attributed to positive sentiment in equity markets, which rebounded during this period. Specifically, tech stocks exhibited strength and spearheaded the upward trend on Wall Street, buoyed by strong earnings reports from major players like Microsoft and Meta Platforms.
It is imperative for informed trading decisions to closely monitor the U.S. economic calendar as high-impact events in the upcoming week may reinforce the bearish bias of the U.S. dollar. Two noteworthy events that require attention are the Fed monetary policy decision on Wednesday and Friday’s nonfarm payrolls survey.
Policymakers of the U.S. central bank are anticipated to increase interest rates by 25 basis points to 5.00%-5.25% as a part of their continuous attempts to bring back inflation to the 2.0% target. The market’s attention will predominantly focus on the guidance for the forecast horizon, given that this decision is already accounted for.
The FOMC recently indicated that it may halt its efforts to tighten monetary policy due to increased economic risks stemming from turmoil in the U.S. banking sector, which has heightened the possibility of a recession. Consequently, traders should pay close attention to any remarks concerning the future economic outlook.
KEY UPCOMING ECONOMIC EVENTS
Should the Federal Reserve make an official decision to halt activity, traders may seek to anticipate upcoming actions, including rate cuts, resulting in a potential weakening of the U.S. dollar. The divergence in monetary policy between the U.S. and other central banks, including the ECB which is projected to continue raising borrowing costs throughout this year, is expected to have a negative impact on the value of the greenback.
The forthcoming U.S. employment report on Friday is of primary interest to Wall Street. The March data, which revealed an addition of 236,000 workers to the economy, likely overestimated its strength, as it failed to account for the complete impact of the banking sector crisis in the U.S. Nevertheless, the April report is expected to provide a more accurate reflection of these developments and correct for any imprecisions.
NFP’s outcomes may not meet expectations, falling short of the predicted 178,000 job gains. In light of plausible situations, a decrease in employment figures may have an unfavorable impact on the U.S. currency as it could prompt a more accommodative reassessment of the Federal Reserve’s monetary policy.
Conversely, a report of alarming nature may actually have a positive impact on the value of the U.S. dollar, at least in the short run, as it would signify an impending recession and instigate aversion to risk. The U.S. dollar is typically advantageous during times of market instability due to its safe-haven attributes.
US DOLLAR (DXY) TECHNICAL ANALYSIS
In recent weeks, the directional conviction of the U.S. dollar has been lacking, with fluctuations occurring between support levels of approximately 100.80 and resistance levels of approximately 102.20. This suggests an ongoing battle between market bulls and bears for control. As long as this range remains unchanged, consolidation of prices is expected to persist.
If the DXY index successfully breaks through its current trading range, which has persisted for about two weeks, there may be an increase in volatility. A bullish breakout at 102.20 would pave the way for a rally towards trendline resistance at 102.80, while a bearish breakdown at 100.80 would expose the 99.40 area.
US DOLLAR (DXY) INDEX CHART
