Dollar Index (DXY) Posing a Downside Risk in Q2

27th Feb 2024: The US Dollar Index (DXY) may find a short-term strength soon, followed by a solid downward trajectory in the long run. Saqib Iqbal, an analyst at Trading.Biz, analyzes the recent economic data, market sentiment and technical variables to form an outlook on the DXY.

The DXY may strengthen amid a resilient US economy with eyes on US Core PCE.

The long-term forecast suggests a bearish picture as the Fed is expected to reduce rates.

The index may end up Q1 with a net gain of 3.27%, followed by a decline.

First, the financial markets anticipate the Fed will cut rates in June, but the market has not yet wholly priced in the impact. This may provide short-term support for the Dollar in the coming weeks. Moreover, the recent economic data like retail sales, core inflation and PMIs suggest resilience in the US economy that keeps the Fed on the backfoot while reducing the rates. Finally, the US Core PCE inflation report is due on Feb 29 and is expected to stay upbeat, resulting in a boost to the Dollar.

However, the long-term view suggests a potential decline for the Dollar based on several factors. The most essential factor is underestimating the Fed’s easing of monetary policy in the future. If the Fed cuts rate more aggressively than expected, it may significantly weaken the US dollar. Moreover, despite the hawkish comments of Fed officials, the recent downturn in the US yields indicates the Fed’s clear rate reduction policy.

The last week’s weakness in the DXY is significant as it was the first week since the new year started that ended up in a net loss. Seasonally, the US dollar faces a decline from the end of March. Hence, the index may end up Q1-2024 at 104.60 with a net gain of 3.27% that may start to weaken later.

Key events to monitor in the coming days include the release of the US PCE report on Thursday, Feb 29, and market reactions to future pronouncements from the Fed. These factors will likely play a significant role in shaping the short-term and long-term trajectory of the Dollar.