Market Analyst at FXTM
The Dollar index (DXY) has broken below the
97 psychological level for the first time since March and is set to wrap up
three consecutive weeks of declines. Having returned to pre-pandemic levels,
the Dollar’s tumble is an overt sign of the risk-on stance in the markets.
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The
Euro’s climb is having a major influence on the DXY decline, with the former
accounting for 57.6 percent of the index’s total weighting. EURUSD’s breaching
of the 1.1350 mark as the European
Central Bank added €600 billion to its emergency bond-buying stimulus
package at its meeting yesterday is exerting further downward pressure on the
DXY.
The US
Dollar’s decline also comes ahead of the May non-farm payrolls due later
Friday. Markets are forecasting a contraction of 7.5 million jobs last month,
after the historic loss of over 20 million in the prior report, while the
unemployment rate is expected to breach 19 percent. Despite the carnage evident
in the US jobs market left in the wake of Covid-19, global investors have grown
accustomed to this narrative since US weekly jobless claims begin soaring in
the second half of March. Hence, financial markets are likely to look past
today’s jobs numbers, barring any massive surprise, especially as the May 12
cut-off for the report points to the data not considering any re-opening
measures in the second half of the month.
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From a
technical perspective, the DXY looks poised for a significant rebound, with the
14-day relative strength index (RSI) having broken into oversold territory.
Previous forays below the 30 line on the RSI, most recently in December and
March, subsequently led to rallies in the Greenback. However, the downward
momentum was not as forceful during those two previous episodes, so it remains
to be seen how much the Dollar can pare its losses amid the present risk-on
environment. At least Dollar bulls can take heart from the fact that since
2019, the DXY’s ventures below its 200-day moving average have not lasted long.
Should
the US dollar continue faltering, the 96 support level could be called into
action once more, as was the case on the final trading day of 2019. While
investors unpick the risk premiums accumulated at the height of the pandemic
with the Greenback set to unwind more of its gains from recent months, we are
unlikely to see a capitulation in the face of the global recession expected for
the year.
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