Photo by Viacheslav Bublyk on Unsplash
 

• Top Wall Street analysts are bearish on the US dollar after the government shutdown ends.
• The view is that the upcoming numbers will point to a soft labor market.
• Technical analysis suggests that the DXY Index has more upside to go.

The USD dollar index pulled back below $100 this week as the Senate voted to end the longest government shutdown in US history. The DXY Index was trading at $99.6, down from this month’s high of $100.30. So, will the dollar retreat as some analysts are predicting?
 

Morgan Stanley and MUFG expect the US Dollar Index to pull back 

The US Dollar Index, which measures the strength of the greenback against a basket of currencies, has retreated this week as Wall Street analysts predict the next move as hopes that the government shutdown is ending have faded.

The Senate voted to end the shutdown, with the bill now moving to the House of Representatives, where some Democrats are expected to vote for it. 

Ending the government shutdown is important as it will enable government agencies to start publishing key macro data on the labor market.

Analysts are mostly bearish on the US dollar now that the government shutdown has ended. In a recent statement, a top analyst at Morgan Stanley noted that the dollar will continue falling as the upcoming data shows the worsening situation in the labor market. He said:

“The more that employment data show a consistently slow pace of hiring, the more investors will begin to price in this structural force via lower real and nominal rates, which in turn weighs on the dollar.”

Other analysts are highly bearish on the greenback. For example, an analyst from MUFG concurred with Morgan Stanley, noting that the upcoming data will show more weakness of the US economy.

Meanwhile, RBC, the biggest Canadian bank, warned that the US dollar index may crash harder in the coming months. The bank warned that the greenback could crash by 40% in the next few years.

ING Bank is also relatively bearish on the greenback as it maintains a bias on foreign currencies. The bank believes that the EUR/USD pair will end next year at 1.21, up from the current 1.1562. 

It also expects the USD/JPY pair to move from the current 154 to 148 in the fourth quarter of the year. Also, the GBP/USD pair is expected to keep rising, while the Canadian dollar will move downwards. A Bloomberg analyst said:

“The more the labor narrative softens, the greater the risk that yield-driven support turns from tailwind to trap.”

DXY Index technical analysis 
 

(Click on image to enlarge)

US dollar index chart | Source: TradingView
 

The daily timeframe chart shows that the DXY Index has rebounded from the year-to-date low of $96.38 to a high of 100.20.

It is now hovering at the 23.6% Fibonacci Retracement level and is slightly above the 50-day and 100-day Exponential Moving Averages (EMA). The two averages are about to cross each other, forming a mini golden cross indicator.

The DXY Index has formed a double-bottom pattern at $96.37 and a neckline at $100.20. Therefore, the most likely scenario is where the index rebounds and possibly hits the 50% Fibonacci Retracement level at $103.30.

A move below the support level at $99 will invalidate the bullish outlook and point to more downside.

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