Bullish Dollar Index Facing Technical Challenges in the Week Ahead

DOLLAR INDEX (DXY) TALKING POINTS:

US DOLLAR TECHNICAL FORECAST: NEUTRAL

• DXY Has Momentum on its Side but Faces a Host of Technical Challenges in the Week Ahead.
• USD/CAD Approaching Key Inflection Point Near Range Top with the RSI in Overbought Territory. Retracement Incoming…?

READ MORE: US Core PCE Rises 4.7% vs 4.3% Forecast, Inflation Pushes Back

US DOLLAR OUTLOOK

The US Dollar enjoyed a fourth successive week of gains as markets have once again adjusted their Fed Funds peak rate expectations up to 5.45% by June 2023. This is in stark contrast to where we stood at the beginning of February with market participants seeing a peak rate around 4.8% in 2023. US data continues to surprise and display resilience while inflation remains somewhat sticky. I have discussed inflation in a few articles of late with it my belief that market participants are too optimistic regarding inflation as I think a lot of the increases have become somewhat entrenched in the economy.

On Wednesday we got a glimpse into the Federal Reserve minutes from the January meeting which indicated a few policymakers were in favor of a 50bps hike. This backed up comments by a host of Fed policymakers over the past couple of weeks reiterating the need for further hikes. Following the minutes, we saw the peak rate expectations increase to 5.37%. Friday brought us the PCE data (which is of course the Feds preferred gauge of inflation) which came in hotter than expected. It rose 0.6% month-on-monthversus expectations of a 0.4% print and is also above the 0.4% increase reported by the core CPI report. Following the data talk of a potential 50bp move at the March FOMCmeeting can’t be completely ruled out. The question remains how much longer can the dollar index continue to rally….?

TECHNICAL OUTLOOK

US Dollar Index (DXY) Weekly Chart

Source: TradingView, prepared by Zain Vawda

From a technical perspective, the weekly chart for the dollar index (DXY) is testing the 50-day MA just above the psychological 105.00 level. This could see the index come in for some retracement in the early part of next week with immediate support resting at 104.68. We have seen four weeks of gains from a low of 100.80 to its current level at 105.20 with very little retracement. The weekly candle is looking extremely bullish however and looks like it has a lot of momentum behind it heading into the new week.

US Dollar Index (DXY) Daily Chart

Source: TradingView, prepared by Zain Vawda

On the daily timeframe the RSI is entering overbought territory which supports the weekly view of a potential retracement early next week. However, resistance rests at 105.67 which contradicts the idea of retracement early in the week and could see us push higher before declining. Should we break above resistance at 105.67 the 100 and 200-Day MA may come into play resting at the 105.90 and 106.40 handles respectively.

The overall picture for the index is mixed as we have such a bullish weekly and daily candle close, yet the RSI is in overbought territory. Also, the fact that we have just posted our fourth week of gains (which we have not seen since October 2022) leads me to believe that we could be in for some form of retracement in the week ahead.

USD/CAD TECHNICAL OUTLOOK

USD/CAD Daily Chart

Source: TradingView, prepared by Zain Vawda

USDCAD enjoyed an excellent week of gains breaking above both the 50 and 100-day MAs with a weekly high around 1.3665, about 35 pips shy of the range high resting at the 1.3700 handle. USDCAD has been stuck in this range between the 1.3250 and 13700 from November 4 with a breakout in the week ahead a possibility. A break above the 1.3700 resistance level will see us make a run for the November 3 swing high around the 1.3800 handle.

However, much like the dollar index the RSI on the daily timeframe has already entered overbought territory and a retest of the 50 and 100-day MAs may occur before the pair decides on its next move.

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— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda