DXY Slides During Powell’s Fed Testimony

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OUTLOOK IN US DOLLAR: PRICE OF DXY INDEX UNDER PRESSURE AS FED PRESIDENT POWELL COMMITS TO PATIENCE DURING TESTIMONY AT CONGRESSION

  • The strength of the US dollar following the Fed meeting last week continues to dissipate
  • the DXY index fell -0.8% from Friday’s high as bears slow rally
  • Federal Reserve President Jerome Powell promises not to preemptively raise interest rates

The US dollar is set to close Tuesday’s trading session, slightly lower by the broader DXY index. This is a continuation of Monday’s modest drop as the strength of the US dollar begins to wane as markets fade part of the post-FOMC rally. Overall, the DXY Index is down about -0.8% from Friday’s high and has now retraced about a third of last week’s trading range.

Weak US dollar over past two trading sessions likely follows Fed Chairman Powell minimize the threat of crumbling. Specifically, the head of the Federal Reserve undermined the importance of the latest dot plot by declaring that it must be “taken with a grain of salt”. FOMC officials predicted two rate hikes by the end of 2023 in the dot plot, which was considerably more hawkish than markets expected. Nonetheless, the Fed’s Powell just swore during testimony in Congress that the central bank will not raise interest rates preemptively.

DXY INDEX – US DOLLAR PRICE CHART: DAILY CALENDAR (FEB 11 – JUNE 22, 2021)

Graph by @RichDvorakFX created using TradingView

Powell also detailed in his prepared testimony to Congress how “the Fed will do everything in its power to support the economy for as long as it takes to complete the recovery.” This could mean continuing to monitor temporary increases in inflation while focusing more on meeting its full employment targets. That said, Powell mentioned during his testimony that the best way for the Fed to reduce inequality and reduce economic disparity was to focus on its employment mandate.

In addition, Fed Chairman Powell acknowledged that record unemployment rates for non-white Americans were the benefits of the long economic expansion in 2019. This could cause FOMC officials to err on the side of caution by remaining patient with it. politics while letting inflation and the economy soar. until full employment is reached. This would likely correspond to further bearish headwinds for the US dollar. As such, the latest higher extension of the DXY index could be seen as a simple countertrend rally.

Focusing on a daily chart of the US dollar highlights how the greenback has already started to move lower from its recent high. This leaves the DXY index looking for near support as the US dollar bulls aim to hold the chain higher lows. The 200-day simple moving average and 38.2% Fibonacci retracement level stand out as technical barriers that can help keep the US dollar afloat. Below this area is the 90.60 price area on the DXY index, which underlies the pre-FOMC breakout level.

On the flip side, the strength of the US dollar could pick up if fears of the Fed’s decline are fueled by another round of robust PMI data. Likewise, US dollar bulls defending technical support could see the DXY index retreat to its month-to-date high, near the price level of 92.50. The invalidation of the descending trendline that connects the swing highs of May 31 and June 18 has the potential to reinvigorate a prolonged rally in the US Dollar and highlight the 93.00 handle.

Keep reading – Gold price to recover in case of risk of Fed rate hike and USD strength decline

— Written by Rich Dvorak, analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for a real-time market snapshot

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