As US dollar grabs the high ground on growth risks, will the USD (DXY) index bounce?

The US dollar has gained some traction to start the week after a weekend that saw protests across China regarding their zero-case Covid-19 policy.

The policy had already raised concern among global investors with rolling lockdowns continuing to impede an economic recovery for the world’s second-largest economy.

The Greenback found support on the back of this perceived negativity and growth-linked currencies, such as the Australian dollar, have seen the largest declines. The Japanese yen is the only currency to outperform the ‘big dollar’ so far today.

Last saw week saw the dollar slide through a holiday-impacted trading environment on the back of a perceived dovish tilt emanating from November’s Federal Reserve meeting minutes.

The week ahead will see a swathe of vital economic data highlighted by US GDP and core PCE figures on Wednesday.

While equity markets took some joy from the Fed’s minutes, the bond market continues to foretell a challenging economic outlook. The benchmark 2s 10s yield curve is inverted to around 80 basis points, a level not seen since 1981.

The fixed-income market is implying that interest rates are going notably higher in the near term but will then ease significantly as the slowdown in economic activity takes hold.

For currencies, it is a game of relativity and once the noise around a potential pivot from the Fed dies down, the superior rate of return from US dollar cash might move into focus again.

DXY (USD) index technical analysis

The DXY index might have a Double Bottom in place and a move above the recent peak of 107.99 would confirm this. Support could be at the prior lows of 105.63, 105.34, 104.64, 103.67 and 103.42. On the topside, resistance might be offered at the breakpoints in the 109.29 – 109.54 region or at the high of 107.99.

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