After hitting a two-week high yesterday, the buying dried up, which confirmed my suspicions that the rally from 97.632 was fueled by short-covering rather than new buying. Based on what I’m seeing, the direction of the next move will be determined by trader reaction to the moving averages. This means we’ll look for an upside bias to develop over 98.867, and for the downside bias to resume under 98.531.
The nearest potential upside target is a short-term retracement zone at 99.138 to 99.493. The closest potential downside target is the long-term retracement zone at 98.097 to 97.496.
The latest technical movement reaffirms what we’re seeing in the fundamentals. Fed policy is supportive, while war uncertainty, oil supply and inflation are bearish factors.
Warsh Is Moving the Dollar More Than Powell Did
The Justice Department dropped its investigation into Jerome Powell and the market barely blinked at that part. What traders focused on was what it means for the transition. Warsh is the leading candidate for Fed chair and the market has been reading him as more accommodative than Powell.
Rate cut probability jumped from 23% to 38% in a single session. Lower rate expectations mean lower returns on U.S. assets and that pulls capital out of the dollar. The U.S. Dollar Index slipped 0.28% to 98.55 and the euro, yen and British pound all gained ground on the same move.
Iran Optimism Added to the Pressure
Renewed diplomatic efforts around Iran lifted risk sentiment Friday and that’s a secondary headwind for the dollar. When fear comes out of the market the safe-haven bid goes with it. Talks remain uncertain but even the possibility of easing tensions was enough to nudge flows away from the greenback. The combination of a shifting rate outlook and reduced geopolitical fear hit the dollar from both sides at once.
