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The US dollar index is under pressure from a complex mix of factors: yen strength, uncertainty about Fed policy, and the consequences of the Treasury's bond-buyback program. Key inflation releases this week will determine the index's path, as we argued in our fundamental analysis and in the note "Dollar (USDX) trades near four-month lows."
The technical picture for USDX remains predominantly bearish. The index trades in a mid- and long-term bear regime, below key moving averages (50-, 144-, and 200-period), while indicators are approaching oversold territory, indicating persistent seller pressure.
Indicators: RSI (14) at about 41 is below the neutral 50 mark, signaling ongoing bearish pressure; Stochastic has entered oversold territory and, together with OsMA, produces a sell signal.
The nearest resistance level sits at 99.00 (psychological level and H1 EMA200). Long entries are considered on a sustained break above 99.20, with targets at 99.40–100.00 and a stop-loss below 98.60.
Conditions for a bullish scenario
- A sustained break and hold above 99.20, confirmed by indicators (RSI above 50, bullish OsMA).
- High PPI and CPI prints that cement hawkish Fed expectations.
- Easing yen pressure or reduction in geopolitical tensions.
A bearish scenario suggests a break of near support at 98.68 (today's low) would likely trigger fresh short positions targeting 98.00, 97.80 (monthly EMA144), and 97.60. A break below 96.20–95.50 would confirm a structural shift and a transition of USDX into a global bear market.
Conditions for a bearish scenario
- A break and hold below 98.68–98.60, opening the way to 98.00 and 97.80.
- Moderate inflation prints that reduce the chance of a Fed hike.
- Continued yen strength and rising odds of BOJ tightening.
The main scenario: consolidation in 98.60–99.20 into inflation prints, with a possible test of 98.68–98.60 and rebound to 99.00 on positive PPI. ING sees no strong reasons for an immediate breach of USDX support in the 98.55–98.65 band but warns that a break could quickly send the index to 98.00.
Reasoning
- USDX is under pressure from factors that offset the dollar's usual safe-haven advantages. The talk of dollar debasement after the Treasury announced buybacks has undermined confidence in the currency. At the same time, a unwind of yen-funded carry trades amid expectations of faster BOJ tightening exerts additional downward pressure on the dollar.
- MUFG notes that higher energy prices increase the likelihood of further Fed tightening, while the 2-year Treasury yield has reached its yearly high. Yet the dollar has not fully reflected higher yields and oil because of an elevated political risk premium.
- The key driver will be inflation prints: above-consensus PPI/CPI will strengthen the Fed's hawkish expectations and may trigger a USDX bounce to 99.20–99.50 and higher. Moderate prints will strengthen the bear case and bring USDX back to test 98.68–98.60 and below.
Trading scenarios
- Bullish scenario (break resistance): Buy stop 99.20. Stop-loss 98.60. Targets: 99.40, 99.50, 99.60, 99.70, 99.80, 100.00, 100.15, 100.40, 100.80, 101.00.
- Bearish scenario (break support): Sell stop 98.60. Stop-loss 99.20. Targets: 98.40, 98.25, 98.00, 97.80, 97.65, 97.40, 97.00, 96.20.
Notes: "Targets" correspond to S/R levels and are guides for planning and position sizing; they are not guaranteed to be reached.
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