Dollar forecast: DXY remains overall positive after eventful week - Forex Friday

The US dollar traded mixed in the first half of Friday’s session, after an eventful week. It was up against the commodity currencies after investors were left unimpressed with China’s $1.4 trillion programme to refinance local government debt. The greenback was also a little firmer against European currencies, while the Japanese yen outperformed as bond yields dipped. The dollar’s failure to add onto its gains to its post-election rally suggests we may have seen a near-term peak, ahead of next week’s US inflation data. Still, major pairs remain below key levels – for example, the GBP/USD was still below the 1.30 handle, while the EUR/USD had only made up half of the election-related losses. So, the picture was muddled overall. Helping weigh on the dollar was easing of bond yields, with the benchmark 10-year Treasury yields having returned to their starting point after a volatile two-day swing. While one can argue the greenback has made a short-term peak, the overall dollar forecast remains positive, especially against currencies subject to increased tariff risks from Trump’s administration.

Eventful week leaves dollar overall supported

It has been an eventful week in the markets and markets are still continuing to digest what Trump’s big victory means for the dollar and other risk assets.

This week, markets have cantered almost exclusively on Donald Trump’s election victory, with expectations that he’ll reshape the economic and political landscape. Stocks and cryptocurrencies surged as investors wagered that a Republican administration would energize US economic growth, boost American industry, and ease restrictions on digital assets. The S&P 500 is on track for its best weekly performance in a year, while Bitcoin has hit fresh all-time highs. So, the underlying trend is still a positive risk environment despite today’s weaker start for major indices.

Though US index futures were a little weaker, the VIX was hitting fresh weekly lows at the time of writing to suggest the rally on Wall Street was intact. The S&P 500 has gained more than 4% so far this week. More significant losses were seen in European markets, though, where the major indices were down around 1%, while Chinese markets slumped 5% on the back of the stimulus disappointment. For the same reason industrial metals were lower, too, while crude oil also eased back more than 1%, lifting the USD/CAD back above 1.3900.

Week ahead: US CPI and UK GDP among data highlights

In the week ahead, the economic calendar contains a few important data highlights, as traders continue to digest Trump’s emphatic victory in the US presidential election.

Chinese CPI

Saturday, November 9

01:30 GMT

China’s inflation data has been quite weak in recent years relative to the rest of the world. CPI was down to 0.4% y/y last month from 0.6% the month before. PPI fell deeper into deflation territory at -2.8% y/y. Deflation – falling prices – is a great danger an economy, as it can discourage spending with consumers, expecting even weaker prices, delay their purchases. While a surge in China’s exports has reduced growth fears, trade war escalation looms, with US president-elect Trump hinting at potential tariffs of 60% shipments from China. China has responded by announcing a $1.4 trillion program to refinance local government debt, aiming to bolster the economy. However, investors were left unimpressed, with China stock-index futures and commodities seeing declines. If the latest inflation data again point to weakness, then expect more stimulus measures to be announced in the weeks ahead.

US CPI

Wednesday, November 13

13:30 GMT

Last month saw CPI come in slightly ahead of expectations, printing 2.4% y/y for September versus 2.3% expected, albeit it was down from 2.5% the month before. This helped to keep the dollar on the front foot leading up to the US presidential election. With Trump’s resounding victory and his plans for tariffs and tax cuts set for 2025, inflation may remain elevated in the US and prevent the Fed from loosening its belt further. In light of that risk, the Fed and the markets may again start paying closer attention to US inflation data. A stronger data could help pressurise the likes of EUR/USD.

UK GDP

Thursday, November 14

07:00 GMT

The Bank of England lowered rates by 25 basis points to 4.75% last week, and Governor Bailey refrained from defining what “gradual” would mean for the pace of future cuts. It is clear a lot will now depend on incoming data, putting this week’s data dump into a sharp focus. As well as monthly and quarterly GDP estimates, we will have various other economic indicators released at the same time.

Dollar forecast: DXY technical analysis and insights

Source: TradingView.com

Key short-term support on the dollar index (DXY) comes in around 104.30, which was the high from Monday which was subsequently taken out during the election. Below this level, 104.00 marks the breakout area post-election, while the 200-day average comes in at 103.85. Therefore 103.85 to 104.30 is a wide support area that needs to be watched and defended to keep the bulls intact. This week’s low of 103.37 is the line in the sand for me. A potential break of that level would mark an end to the current bullish trend, as we will then have our first lower lows in place. In terms of resistance, 105.00 is the key area to watch now. A daily close above this level could see the DXY star heading towards the highs from earlier this year of 106.13 (June) and 106.51 (April).

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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