Daily Market Recap – DXY Beware of the potential rebound of the dollar

The dollar is under pressure in the short term in the face of falling long rates and improving prospects for reopening in Europe. It must be said that the pace of vaccination in Europe is off the charts. The EU has vaccinated as many people in the last 30 days as it did in the first 4 months of the year.

This marked acceleration in the vaccination campaign is a cause for optimism and has prompted many governments to announce decontamination programs. The euro has naturally rebounded, up 0.55% at market close on Friday against the dollar. The pair will likely reach a critical junction in the coming week around the 1.215 marks. A reversal at this point will signal a resumption in its longer-term downtrend.

The renewed optimism in the euro may only be temporary after all as the dollar may recover in the near future. For this to happen, the US employment figures will have to positively surprise expectations, as they have been rather disappointing in recent weeks.

Indeed, although the various inflation barometers show a strong acceleration in prices in March and April, notably due to a significant base effect, the Fed, unlike the ECB, has a dual mandate. In addition to price stability, the Federal Reserve must maximize employment in the country. This second objective is still far from being achieved.

The unemployment rate was 6.1% in April compared to less than 4% before the crisis and 16 million Americans were still receiving unemployment benefits (all programs combined) last week compared to barely 3 million in February 2020.

So there is no hope that the Fed will normalize its monetary policy any time soon, even with inflation above its 2% target. The keystone will be the labor market. The faster the US economy recreates the jobs destroyed/suspended during the crisis, the faster the Fed will normalize its monetary policy.

In terms of technical analysis, the DXY's short-term dynamic is bearish. Nevertheless, we can see the presence of a bullish divergence of the RSI on the daily time unit even though the DXY is back on support at 90.

This bullish divergence indicates a slowdown in selling pressure and could precede a rebound in the direction of the medium-term uptrend. However, it will be better to wait for more convincing bullish signals such as a bounce in the daily RSI above 50, a bullish reversal pattern in the price (bullish engulfing, morning star, etc.), or a bounce above resistance at 91.42.

(Chart Source: Tradingview 16.05.2021)

For now, traders should observe the price action around the key 90 marks to gauge potential entry into long positions around this level to take advantage of a bullish bounce off the support. This short-term play would target the immediate upside level along with the 90.8 handles.

Support & Resistance Levels:

R3 92.067

R2 91.363

R1 90.800

S1 89.982

S2 89.000

S3 88.233

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.