The recent rebound in the US Dollar Index seems to be over. Economists at Credit Suisse are maintaining a tactically negative outlook, looking for a move back to the 100.82 year-to-date (YTD) low and eventually target stronger support at 98.98/97.89. They remain skeptical about the potential for a continued recovery in the US dollar, given the current macroeconomic environment and various technical indicators.
In their latest research report, they highlight the importance of the resistance level at 103.36, which they believe should ideally cap any further upside to keep the immediate risk lower. If this level is breached, they see the potential for strength to return to the US dollar, possibly pushing the index towards 105.12.
Over the past several weeks, the US Dollar Index has experienced a roller-coaster ride, starting around the 100.82 level YTD low and then rallying sharply towards 103.36. The recent rebound has been attributed to several factors, including an increase in risk aversion among investors, leading to a flight to safety into the US dollar. Additionally, market participants anticipated a more hawkish Federal Reserve in response to high inflationary pressures and a tightening monetary policy outlook.
However, the rally in the US Dollar Index has subsequently lost its momentum, and the index has seen a pullback towards the 101.5 level at the time of writing this article. It seems that the market has now reassessed its expectations about the potential for a more hawkish Fed and the overall macroeconomic picture. Furthermore, technical analysts point to various warning signs of potential weakness in the US dollar, such as a bearish engulfing candle pattern on the weekly chart and the index failing to break above key trendline resistance.
Despite the current risks to the US dollar, the Credit Suisse report also notes that potential support levels could come into play at 100.82, the YTD low, and eventually at 100.00, another psychologically important round number. However, they emphasize that they expect these levels to break, and the index should ultimately target stronger support starting at the 61.8% retracement of the 2021/2022 uptrend at 98.98 and stretching down to 97.44, which also includes the long-term 200-week average at 97.89.
Enhancing these bearish outlooks, the Federal Reserve has signaled a more cautious approach to monetary policy tightening, given the uncertain trajectory of the economic recovery and potential headwinds from geo-political tensions and increasing energy prices. Moreover, the US Treasury yield curve has inverted, indicating potential risks of a recession, which could further weigh on the US dollar in the medium term.
In summary, the latest research by Credit Suisse emphasizes caution about the US Dollar Index’s potential for further upside. They maintain a negative outlook for the coming weeks and months, with their primary targets being a retest of the 100.82 YTD low and ultimately a move towards stronger support in the 98.98 to 97.89 region. They see the 103.36 resistance level as a critical level to watch, with any breach potentially changing the immediate risk assessment for the US dollar.
However, given the ongoing uncertainties in the global macroeconomic landscape and erratic market sentiment, the path of the US Dollar Index’s future trajectory remains subject to numerous influential factors. As a result, investors should continue to monitor key data releases, central bank communication, and geo-political developments closely, which could all impact the US dollar and its associated currency pairs.
