DXY At A Major Inflection Point

The U.S. dollar has mounted a comeback in May bouncing off a double bottom with mixed economic data. There are a variety of macro and technical factors that will guide where the dollar goes from here. 

First, the debt limit deal is currently with Congress and has a deadline of June 5th to increase the countries borrowing level, and signed into law. Given the history of Congress, things tend to get sorted out right at the last minute. If the deal happens as-is with a 2-year window and four trillion in additional borrowing capacity, it will signal a decline in the dollar, and potentially an equity relief rally. 

Second, the Federal Reserve has given indication that they plan to pause interest rate hikes for the June meeting, and assess future rate hikes off of macroeconomic conditions leading up to their next meeting. If this remains to be true, it will cause the dollar to decline and a summer rally for the equity markets. 

Nonetheless, both scenarios look to get sorted out within the next two to three weeks. Looking at the U.S. Dollar Index DXY we are given some very good insight into the price action and statistical distribution that traders have been making this year. The key technical points to note are the following:

• A descending wedge started and completed from November 2022 – February 2023. 

• Price has been consolidation between the 100-105 levels since mid-February and has created a double bottom in the process. 

• Price is currently trapped in-between the 20-period and 200-period simple moving averages. A breakout above the 200-period simple moving average and resistance becoming support would be meaningful.

• The price action is within a stage four of a traditional cycle meaning price is most likely headed higher from here. 

• A B-shaped volume profile with two D-shaped profiles separated by single prints with 2x more volume on the bottom profile, and a bounce off the point of control at 101.925 is bullish. 

• Low Volume Nodes on volume profile between 107-109 is where price will look to re-trace and where the 61.8% Fibonacci retracement and fair value gap also reside. 

• The Weekly chart shows price retracing from the 50% Fibonacci level and now heading higher above the 20-period and 200-period simple moving averages. 

Regardless of how things get worked out a few things remain with a high probability of occurrence:

1. Interest rates will go higher in the near future, but where the Federal Reserve draws the line remains uncertain.

2. The debt ceiling will be raised, but to what extent and under what conditions? 

3. Geopolitical issues will be watched closely as the dollar has been by-passed for cross-border trades between China and Brazil. Other countries have been willing to discuss not trading with the dollar in future trade deals.

Daily Chart

Weekly Chart