The U.S. dollar continues to float near a three-year low. It still needs some big catalysts to really turn the tide. Now sitting at around 98, the dollar’s recent performance is a sign of things to come—a rush to safety in the face of global economic malaise. Analysts suggest that potential shifts in Federal Reserve guidance, inflation data, and global market risk dynamics will play pivotal roles in determining the dollar’s next moves.
And of course, the Federal Open Market Committee (FOMC) meets next on June 18. Analysts are largely betting that they’ll do the same with US interest rates, leaving them unchanged. A shift towards a more hawkish stance during this meeting could provide the dollar with the momentum it desperately seeks to reverse its fortunes. Yet at the very moment, the dollar is under tremendous pressure. Weaker economic indicators are painting a troubling picture of the U.S. economic health.
In fact, a recent administration-sponsored study found that the Consumer Price Index (CPI) for May already increased only slightly by 2.4% over last year. This expansion has been instrumental in preventing real yields from rising much. The disappointing inflation figures buttress expectations that the Federal Reserve will remain on hold with interest rates. Consequently, this might pose an obstacle to any rapid rebound for the dollar.
Perhaps inflation comes back to bite us with a shock increase in a few weeks. If it does, it might set in motion a self-reinforcing reversal of the dollar’s present fortunes. Should inflation figures come in ahead of expectations, market players will be quick to revise their interest rate forecasts. This change would provide a welcome shot in the arm to the dollar.
This is partly because the dollar’s recent strength has been propelled by global risk sentiment. New Iranian hostilities—exemplified by last week’s escalation with Israel—sent global markets into a tailspin. Investors appeared to overlook the dollar’s usual safe-haven status, a sign that they could be looking for safer alternatives. Analysts are warning of a black swan event due to a major increase in global risk aversion. Such a change would greatly enhance the dollar’s status as a safe-haven asset.
Even with these possible catalysts, the bearish bias for the dollar holds below the 98.50 level. Analysts point out that an excessively hawkish approach from the FOMC might be what it takes to light the fuse of short-covering in the markets. This move could be the catalyst for a substantial short dollar relief rally.
The dollar’s technical outlook looks to the critical resistance levels between 98.519 to 98.862 on the 4-hour chart. Any inability to pierce through this zone would likely result in additional downside price action for the currency. On the other hand, if the dollar reverses this resistance point, it could indicate the beginning of a new buying opportunity.
The market is understandably skittish at this moment. Most investors are right now waiting with bated breath for any signs of major change at the July FOMC and then in subsequent economic data releases. It is this interplay of all these factors that will decide whether the dollar is able to have a comeback or the dollar’s downward trend will prevail.