US Dollar Forecast: USD Trade Setups & Themes For Next Week

The US Dollar has dominated the currency market since the start of 2020 with the DXY Index – a benchmark measuring USD performance against a basket of other major currency pairs – charging 2.7% higher.

Greenback gains so far this year can be primarily attributed to the recent strength of the US economy outperforming relative to baseline expectations, which has been exacerbated by an influx of risk-aversion due to concerns over the novel coronavirus outbreak.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (JULY 2019 TO FEBRUARY 2020)

DXY Price Chart US Dollar Index Technical Analysis

Chart created by @RichDvorakFX with TradingView

The DXY Index is on pace to close above the 99.00 handle as forex traders continue to bid up the US Dollar following the series of solid economic data releases like nonfarm payrolls reported last week in addition to inflation figures and consumer sentiment data published this past Wednesday and Friday respectively.

After topping the 76.8% Fibonacci retracement level of the US Dollar Index’s most recent bearish leg, there seems to be an open stretch of runway for USD price action to continue its ascent higher to 2019 highs.

Although it is arguable that the US Dollar is overextended, the expanding Bollinger Band ™ could perhaps facilitate further upside potential before a mean-reversion lower or consolidation occurs.

USD MAY RISE IF FED BALANCE SHEET GROWTH DECELERATES

(Click on image to enlarge)

Fed Balance Sheet Chart US Dollar Forecast

Another fundamental development that has improved USD price outlook is the first sign of the Federal Reserve easing off the gas regarding its speed of balance sheet expansion.

Specifically, the New York Fed announced Thursday afternoon that it will decrease its aggregate limit on overnight repurchase agreement operations (repos) from $120 Billion to $100 Billion and cap for term repos from $35 Billion to $25 Billion.

US DOLLAR COULD EXTEND GAINS IF FOMC MINUTES UNDERSCORE NEUTRAL MONETARY POLICY OUTLOOK

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