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US Dollar Correction in Play amid Failed Attempt to Test 2017 High

US Dollar Talking Points

The US Dollar index (DXY) pulls back following the string of failed attempt to test the 2017 high (103.82), and the greenback may continue to consolidate over the remainder of the month as the bullish momentum abates, with the Relative Strength Index (RSI) falling back from overbought territory.

Technical Forecast for US Dollar: Neutral

DXY gives back the advance from the yearly low (94.65) as the Federal Reserve take unprecedented steps to combat the weakening outlook for growth, while US lawmakers agree on a $2T fiscal stimulus package amid the growing number of COVID-19 cases.

In turn, the technical outlook suggests the US Dollar will consolidate over the remainder of the month as DXY extends the series of lower highs and lows from earlier this week, and the response by US authorities may continue to drag on the greenback as Federal Open Market Committee (FOMC) plans to establish a “Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses.”

Nevertheless, the broader outlook for the US Dollar remains constructive as the 50-Day SMA (98.62) and the 200-Day SMA (97.99) reflect a positive slope, and the greenback may regain its footing in the second quarter of 2020 as the global supply/demand shock triggers a flight to safety.

DXY Daily Chart

DXY Daily Price Chart

Source: Trading View

The monthly opening range was a key dynamic for DXYin the fourth quarter of 2019 as the indexregistered a major high on October 1, with the monthly low for November occurring during the first full week, while the high for December happened on the first trading day of the month.

The behavior carried into 2020 as DXY carved the monthly low during the first week of January, while the February low occurred on the first trading day of the month.

However, the monthly opening range has become less relevant in March amid the pickup in market volatility, with DXY pulling back from the yearly high (102.99) following the string of failed attempt to test the 2017 high (103.82).

The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator falls back from overbought territory, and the recent series of lower highs and lows in DXY raises the scope for a larger correction, with a break/close below the 98.80 (50% retracement) to 99.20 (61.8% expansion) region bringing the Fibonacci overlap around 97.60 (23.6% expansion) to 98.20 (50% expansion) on the radar.

The next area of interest comes in around 97.10 (38.2% expansion) followed by the overlap around 95.90 (23.6% expansion) to 96.00 (50% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong