US Dollar (DXY): Sharp Weekly Decline Raises Valuation Concerns as Euro Surges

Highlights

• Dollar experiences largest weekly decline, faces downward pressure.
• Euro reaches 16-month high, signaling upward trajectory.
• Traders await economic data and policy decisions, anticipate impact on currency markets.

Overview

The U.S. Dollar (DXY) is experiencing downward pressure on Monday as it struggles to recover from its largest weekly decline of the year. Traders are cautiously awaiting economic data and policy decisions before deciding on further selling. Meanwhile, the euro continues its upward trajectory, reaching a fresh 16-month high at $1.1249, marking a 0.4% increase. Against the Japanese yen, the dollar fell 0.5% to 138.001 yen per dollar, hitting its lowest point in two months on Friday.

Next Move Hinges Upon FOMC Decision

Last week’s surprise disinflation in the U.S. has reshaped the foreign exchange landscape. However, the market will closely observe the impact of a few days without significant data releases to determine whether this trend will continue, especially with the impending risk event of the Federal Open Market Committee (FOMC) decision.

Dollar Index May Rebound if Euro Corrects

While the euro/dollar pair has shown impressive gains in the short term, some analysts believe a correction could be in store for this week. The recent U.S. inflation data has prompted investors to speculate that the Federal Reserve may be nearing the end of its rate hike cycle. Consequently, the dollar index recorded its most substantial weekly decline since November 2022, falling 2.25% over the course of the week.

Slower Inflation Growth Fuels Sell-off

Data released on Thursday revealed that U.S. producer prices saw minimal growth in June, resulting in the smallest annual increase in nearly three years. This followed the previous day’s report showing modest consumer price growth. Looking ahead, the market expects rate hikes from both the Federal Reserve and the European Central Bank next week, but beyond that, expectations suggest that the Fed will likely pause before considering rate cuts next year, while another hike may be on the horizon for Europe.

Traders Anticipating Fed Policy Normalization

The foreign exchange market is already positioning itself for the potential normalization of Fed policy in 2024. However, there is uncertainty as to whether the dollar sell-off has gone too far, leading to a potential mean reversion risk early this week. Traders will be watching closely to see how these factors play out and how they might impact currency movements in the near term.

Short-Term Forecast:  Bearish but Ripe for Rebound

In summary, the U.S. dollar is facing downward pressure as the euro continues its climb to a 16-month high. Recent U.S. economic data and market expectations regarding central bank policies are contributing to the dollar’s decline. Traders will be monitoring upcoming events and data releases to gauge the potential direction of currency markets in the short term.

Technical Analysis

The US Dollar (DXY) is currently experiencing a bearish market sentiment as it struggles to recover from its largest weekly decline of the year. The 4-hour price is slightly below the previous close, indicating a minor decline. Both the 200-4H and 50-4H moving averages are above the current price, reinforcing the bearish sentiment. The 14-4H RSI is below the neutral level of 50, suggesting weaker momentum.

The main support area is between 99.630 and 100.016, while the main resistance area ranges from 103.280 to 103.424. Considering these factors, the market sentiment for the US Dollar is currently bearish in the short term. Although the market appears ripe for a technical bounce following a successful test of support.