US Dollar Outlook: DXY Index Recoils Higher – Where To Next?

The broader US Dollar regained lost ground on Tuesday with the DXY Index rising about 0.4% to erase prior session losses. US Dollar strength was seen across the board of major currency pairs and most prominent across AUD/USD price action. Aside from general risk aversion and corresponding demand for safe-haven currencies like the USD, fears of not-so transient inflation seem to have intensified and heated up the conversation on when the Federal Reserve might start normalizing policy.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (24 DEC 2020 TO 04 MAY 2021)

DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

After mentioning that the Fed may have to raise rates to prevent the US economy from overheating early on Tuesday, Treasury Secretary Janet Yellen backtracked on her remarks later in the session. The former FOMC chair clarified that she does not believe inflation would be an issue and is not predicting nor recommending a rate increase, adding that interest rates are expected to remain low in the future. Not to mention, if Fed tapering and out-of-control inflation was perceived as a real threat by markets, it is hard imagining that the ten-year Treasury yield would still be hovering around 160-basis points.

This brings to focus potential for the US Dollar and broader DXY Index to struggle at technical resistance posed by the 91.40-price level, which is underpinned by the mid-March swing lows and the negatively sloped 20-day simple moving average. If US Dollar bulls can muscle their way through this technical barrier and reclaim the 50-day simple moving average, however, the DXY Index could extend toward its upper Bollinger Band. A resumption of US Dollar selling pressure could bring trend support into focus near 90.50.

USD PRICE OUTLOOK – US DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges

That said, US Dollar price action looks set to accelerate during Wednesday’s trading session. This is judging by the latest overnight implied volatility readings for select US Dollar currency pairs. Looking to the DailyFX Economic Calendar, we see little high-impact event risk, though several Fed officials are scheduled to speak who could add some color on mounting inflation fears and taper speculation. Furthermore, ADP employment data is slated for release tomorrow and often serves as a precursor to the monthly nonfarm payrolls report due on Friday.

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