DXY Turns to Wall Street as Economic Docket Quiets Ahead

US Dollar Weekly Forecast: Neutral

• of USD Three-week win streak ended with lukewarm performance
• Still-strong labor data paves way for Fed to resume tightening
• Bullish Golden Cross Between DXY Moving Averages Offers Some Support

Fundamental analysis

The US dollar (DXY) fell about -0.2% last week, ending a three-week winning streak. Indeed, the last five days have been pretty bearish. A rather rosy week for market sentiment has dampened demand for haven assets such as the US dollar. Keeping the currency buoyant pushed US Treasury yields higher over the weekend.

The latter was triggered by the latest nonfarm payrolls report. At face value, it was pretty complicated. The country added 339,000 jobs in May, well above the forecast of 195,000, after last month’s employment figures were revised upward from +253,000 to +294,000. . The downside to the report was the unexpected rise in the unemployment rate from 3.4% to 3.7%. Economists focused on maintaining 3.5%.

Looking at the market reaction, financial markets took the data as another strong sign that the labor market is still tight. Statistics earlier this week showed there were about 1.8 job openings for every unemployed person. The rise in U.S. Treasury yields on the day reflected cooling expectations of a rate cut by the U.S. Federal Reserve (Fed). Most forecasts put a roughly 75% chance that the Fed will pause in June and at least one rate hike in July.

This is why the USD is likely holding on despite the lack of demand for safe haven assets: a strong economy. The coming week sees a notable reduction in the risk of significant economic events. Initial unemployment claims are some of the most timely data we have on the labor market. Apart from that, factory orders can also be another source of event risk.

As such, the US dollar’s focus could shift to general risk appetite, especially given that a debt ceiling deal was reached among government officials. With the Fed’s moratorium and solid economic data driving momentum, the US dollar will likely see gains over the next week, especially if sentiment remains strong and Wall Street continues to rise undisturbed by stable US Treasury yields. It may tick.

technical analysis

Technically speaking, a bullish golden cross recently formed between the 20-day and 50-day simple moving averages on the DXY chart below. This creates a slight upward bias. Near-term resistance appears to be at the 23.6% Fibonacci retracement level 104.11. A further rise above this exposes the March high of 105.88. In the event of a drop, the moving averages are likely to hold as support. Otherwise, expanding the lower bound will show the range 100.82 to 101.29.

DXY daily chart

Charts created with TradingView

— By Daniel Dubrowski, Senior Strategist, DailyFX.com