Currency Pair of the Week: DXY

Big earnings, an FOMC meeting, important economic data, the track of the coronavirus, and the infrastructure bill could provide movements of the US Dollar index

USA (2)

Although the US Dollar Index is (DXY) not a currency pair, the index has the potential for a good deal of volatility this week.  Big earnings, an FOMC meeting, important economic data, the track of the coronavirus, and the infrastructure bill could provide movements of the index,  as well as all US Dollar pairs.

What is the US Dollar Index (DXY)?

FOMC

The FOMC meets on Wednesday. Expectations are for unchanged on monetary policy; however, traders will be focused on the wording of the statement for clues as to when the Fed may announce that they will begin tapering. Despite an increase in inflation over the last few months, Fed Chairman Powell testified recently that we still have not seen “substantial further progress” in the labor markets to warrant a tapering of bond purchases.  During April, May, and June, payrolls were +266,000. +583,000, and +850,000, respectively.  Although moving in the right direction, the April and May estimates were much higher than the actual prints.  In addition, last weeks intimal jobless claims print was 419,000 vs 340,000 expected, the highest since May 16th.   Powell also was insistent that current inflation is mostly transitory.  On Friday, we receive what is said to be the Feds favorite measure of inflation, the Core PCE Price Index. Expectations are for a print of 4.2% YoY vs 3.9% in May. 

Everything you need to know about the Federal Reserve

Earnings

Big tech earnings this week could move stocks, which therefore could cause volatility in the US Dollar Index.  Names such as Tesla, Apple, Alphabet, Microsoft, Facebook, Amazon will all be front center.  Earnings in general have been stronger than estimates, however, Netflix was worse than estimated and Intel provided weaker guidance.  If large tech companies are weaker than estimated or guidance is lower, it may bring stock indices lower, which could cause the DXY to move higher.  Also note that Robinhood is expected to go ahead with its IPO later in the week.

Economic Data

The is quite a bit of economic data this week from the US which could move the DXY.  This list includes US Durable Goods,  the first look at Q2 GDP, Initial Claims, Core PCE, and Personal Income and Spending.  If data comes in weaker,  it may give the Fed more ammunition to continue with their bond purchases.  In addition, expectations for the Advanced Q2 GDP are 8.5%.  If this print is weaker, it may provide clues that growth has peaked sooner than expected, which may allow the Fed to continue tapering.  This may push stocks higher and the DYX lower.

What are economic indicators?

Coronavirus

The Delta variant of the coronavirus is causing cases to increase in the US and around the world.  In the US alone, cases were up over 60% last week.  On the positive side, although the Delta variant is more contagious, is isn’t as deadly.  Therefore, hospitalizations and death rates are still low. However, if the number of new cases continue to increase regionally or globally, it could cause volatility in individual US Dollar pairs.

Infrastructure

After failing in a procedure vote, US Democrats and Republicans still can’t seem to agree on the bi-partisan physical infrastructure deal.  Even if enough Republicans support the bill, there are a number of Democrats who have been alienated because the measures Dems have sacrificed.  In addition, if the vote succeeds in the Senate, there is no guarantee that it will pass the House of Representatives.  With an August 9th 5-week recess looming, parties will be under pressure to get this done.  No deal soon could cause stocks to move lower and the DXY to move higher

Technicals

After breaking out of a short-term wedge at the end of May, the US Dollar Index has retraced to the target of the wedge (a 100% retracement) and continued moving higher in an upward sloping channel.  However, DXY ran into resistance last week near 93.17 at the top trendline of the channel, a long-term downward sloping trendline from November 2020, as well as a diverging RSI.  Today, the index is pulling back and testing the bottom trendline of the channel near 92.50.

Source: Tradingview, FOREX.com

On a 240-minute timeframe, support is just below, at the bottom channel trendline near 92.45, the July 6th lows near 92.00, and the June 23rd lows at 91.76.  Resistance is above at the top trendline of the channel near and the March 31st highs near 93.30/93.40. 

Source: Tradingview, FOREX.com

Although DXY is not a currency, it is a currency index (US Dollar).  There are many events occurring this week which could be pivotal for the next direction of the US Dollar. This will not only affect the index, but quite possible all US Dollar pairs.  Traders should be on alert for these high-profile events and manage US Dollar risk accordingly.

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