The dollar buying has paused, at least for the time being. After rising for five consecutive days, some bullish traders are undoubtedly booking profit ahead of this week’s key fundamental events. Others who missed the rally are not going to steam in on the long side without a pullback of some sort. But we think that the dollar may have made a bullish breakthrough in recent days and thus expect it to resume its short-term uptrend soon. The rising bond yields in the U.S. should keep the dollar supported as the market looks forward to two or three more rate increases from the Federal Reserve this year. In contrast, central banks elsewhere have been backtracking on their recent hawkish remarks, not least the Bank of Canada and Bank of England.
This week, both the European Central Bank and the Bank of Japan are likely to also lean more towards the dovish than hawkish side. After all, most of the first quarter economic data in Germany – the Eurozone’s economic powerhouse – have been disappointing. What’s more, ongoing concerns over trade may discourage even the hawkish policymakers from trying to tighten monetary policy. If the ECB does come across as being more dovish than hawkish then this could undermine the euro further and underpin the dollar. There is also the possibility we will see a positive surprise when the first estimate of US Q1 GDP is published on Friday given that expectations are so low. But if the ECB is surprisingly hawkish and or US data disappoints then the Dollar Index may come under real pressure again due to a potential rally in the EUR/USD exchange rate.
More bullish signs for dollar
Last week we reported that the Dollar Index (DXY) was showing tentative bullish signs. Well, those signals proved to be valid as the DXY has now formed further bullish price action. As can be seen on the updated chart of the dollar, it has now broken above the long-term bearish trend line. This trend had been in place since the end of 2016. In doing so, it has also cleared resistance in the 90.45-90.60 range. This area is now going to be the first and key support area to watch. For as long as the dollar remains above this range, the path of least resistance would be to the upside.
If support does not come in here then there is a risk that the DXY could drop to the next support at 89.95 before making its mind up about the next directional move. But after a five-day winning streak, the dollar does look a little bit overbought in the short-term outlook. What’s more, it is now testing resistance at 91.00, which was also the 2017 low. So, there is a possibility for a short-term pullback now. However, we think that the dips will be shallow and expect this 91.00 resistance level to give way eventually. If and when that happens, then the bulls will look to aim for the 91.75-91.92 resistance range as their next objective.