The US Dollar Index rose modestly last week after Donald Trump softened his tone about Jerome Powell, the Federal Reserve Chair, and his tariffs. After initially falling to a low of $97.50 on Monday, the index ended the week at $99.17. This article explores why the US dollar index rose and whether this is the end of the sell-off.
Why the US dollar index rose
The greenback has been in a strong sell-off after hitting the key resistance level at $109.85 earlier this year.
This sell-off happened after Donald Trump was sworn in and started a trade war with other countries. He started his trade war by announcing huge tariffs against Canada and Mexico, two of the US’s biggest trading partners.
These tariffs effectively ended the USMCA trade deal that he negotiated in his term. After that, he announced sweeping tariffs on cars, aluminium, and steel. And then earlier this week, he delivered his Liberation Day speech, in which he delivered his ‘reciprocal’ tariffs.
All these unilateral issues forced investors to question the role of the US dollar as a safe-haven currency. There were also concerns about the rising odds of the US falling into a recession this year.
All these factors pushed invesors to other currencies like the Swiss franc, euro, Japanese yen, and sterling.
The US dollar index has now stabilized after Trump expressed his hope of having trade deals with other countries. Talks are going on with countries like Japan and South Korea.
Also, the US has announced that the US will start talking with China to lower the substantial tariffs. The WSJ has reported that the US was considering lowering his tariffs against China to 50% as its opening salvo.
However, Scott Bessent, the Treasury Secretary, has warned that a trade deal between the two countries will take time to happen. He expects the deal to take a few years to conclude.
Top catalysts for the US dollar
Looking ahead, trade will be the most important catalyst for the US dollar index in the coming weeks. Signs of major trade deals will support the currency and push its value higher.
The other top catalyst will come out on Tuesday when the Conference Board releases the consumer confidence report. This is a crucial report since consumer spending is the biggest part in the US economy. Weak confidence leads to low spending.
The US will also publish the latest GDP data on Thursday. After expanding in Q4, analysts anticipate a slight recovery in Q1 as tariff jitters rose. The IMF downgraded the US economic guidance for the year in its outlook last year.
The US will then release the latest nonfarm payrolls (NFP) data on Friday. Economists expec the data to show that the economy added 140k jobs in April after creating 228k in the previous month. The unemployment rate is expected to remain unchanged at 4.2%.
DXY Index technical analysis
The daily chart reveals that the US dollar index has rebounded in the past few days. It jumped from a low of $97.50 to $99.71. However, there are signs that the index remains in a deep sell-off.
It has already formed a death cross pattern as the 50-day and 200-day moving averages crossed each other. It has also retested the key level at $99.71. A break-and-retest is a popular continuation sign.
It has also formed an inverse cup and handle pattern. Therefore, the outlook for the DXY Index is bearish, with the next level to watch being at $95. A break above the resistance at $101.56 will invalidate the bearish outlook.
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