Dollar Index: Investors Buy Dollar as Trump Trade Ramps Up

On the other hand, other currencies are suffering under the weight of the dollar and the likelihood that Trump’s policies will affect most major economies.

Dollar Index Fundamental Analysis

Since Trump’s win, experts have predicted a bright future for the US economy and the dollar. Before his win, Trump had proposed some drastic changes that would boost economic performance in the US. Some of these changes include aggressive trade practices that would mean higher tariffs on imported goods to boost local businesses. At the same time, he proposed more strict laws on immigration and more significant tax cuts.

Such policy changes will significantly hurt economies that export most of their products to the US. The most affected countries are China, the Eurozone, and Canada. Consequently, the Canadian dollar, the Euro and the Yuan have plunged in response to Trump’s win.

Furthermore, experts have noted that the Republican party will have control over both houses of Congress, making it easy to pass these policy changes. An unexpected rebound in the economy and demand will likely lead to a spike in inflation. The US Central Bank has been working tirelessly to reduce demand in an overheating economy. Signs of a slowdown allowed the Fed to pivot and start cutting interest rates.

However, with the new president, the future might be complicated. If inflation spikes, the Fed will be forced to pause its rate cuts and even increase interest rates. Such an outcome would be bullish for the dollar.

Currently, Fed rate cut expectations are dropping. Last week, markets were pricing an over 80% chance of a December rate cut. However, this probability has fallen to 69%. If this drop continues, the dollar index will keep climbing.

Dollar Index Technical Analysis

On the technical side, the 4-hour chart shows a new high for the bullish trend. The price had initially traded above the 22-SMA in a steep bullish trend before pausing near the 104.50 resistance level.

Here, the price made a deep pullback that broke below the SMA. At the same time, the RSI dipped below 50 into bearish territory. However, bears failed to sustain a move below the 103.50 support level. Meanwhile, a sudden surge in bullish momentum led to a gap above the 22-SMA. Similarly, the RSI crossed back into bullish territory.

The dollar index is currently back in a bullish trend pattern, making a higher low and high while respecting the 22-SMA as support. Therefore, bulls might soon revisit the 105.75 resistance level.

However, on a larger scale, the RSI is showing fading momentum, making lower highs and lows. If this continues, the price might make another corrective move before it climbs higher.

On the daily chart, the dollar index has maintained a bullish trajectory and only pulled back once to retest the 22-SMA support. At the same time, the RSI has remained above 50 since bulls took charge. The price is approaching a solid resistance zone comprising the 105.75 and the 106.25 levels. It might pause at one of these levels and retreat to the SMA support.

On the other hand, if bullish momentum remains strong, the price will break past this zone to make new highs in the bullish trend. Moreover, the bullish bias will remain strong as long as the price trades above the SMA and the RSI remains in bullish territory.

Key Support Levels

Support 1: 104.50, a 4-hour resistance turned support

Support 2: 104.00, a solid daily support level.

Support 3: 103.50, a 4-hour swing low

Key Resistance Levels

Resistance 1: 106.25, a daily swing high

Resistance 2: 105.75, a daily swing high

Final Thoughts

With Trump as the new US president, the future of the US economy is bright, meaning higher inflation and a stronger dollar. Moreover, the Fed’s policy outlook might change as policymakers try to adjust to higher inflation.

On the other hand, other economies that heavily depend on the US will suffer. Import tariffs will discourage trade between the US and major economies like China, the Eurozone and Canada. This, in turn, will mean that the currencies of these countries will suffer.

Meanwhile, market participants are preparing for US inflation figures due on Wednesday. If inflation is higher than expected, it will be one more reason for the dollar index to rally. Otherwise, soft figures might lead to a pause in the recent rally, and this is what traders are awaiting to trade on.

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