The dollar prefers to stay within the range for now

The US dollar turned downward at the end of the day on Tuesday and continues to move downward in the first half of Wednesday. The dollar is being weighed down by the recovery of positive momentum in the stock markets. Pressure on the dollar can also be linked to Powell's latest comments yesterday evening. The Fed chairman confirmed the path to further rate cuts and said asset sales from the balance sheet could be halted soon, ending the quantitative tightening phase.

Such statements should not come as a shock to the markets, merely confirming previously announced plans. However, the dollar index reacted strongly to them, as it was in a resistance zone. The DXY once again encountered the same resistance near 99.30, from which it retreated in early August. This line also coincides with the area of corrective pullback to 76.4% from the highs in January to the lows at the start of July.

Technically, the dollar remains within the correction range typical of fairly aggressive markets, as a typical correction implies a pullback to 61.8% (101.3 in our case). We will only gain more confidence in the path the dollar chooses once the DXY breaks out of the 96–99.4 range, suggesting further movement toward the breakout.

At the same time, we see politics, not technicals, as movement drivers. During their announcement and discussion, US trade tariffs are putting pressure on the dollar, and buyers are stocking up on goods before the increased tariffs are announced. However, these same tariffs have a medium-term positive effect on the dollar, causing a reduction in the US trade deficit and supporting investment in the production of analogues within the US.

However, the current moment is crucial from a historical point of view. Since the summer, the DXY has been trading near the support line of a 13-year uptrend. A fall in the dollar below 96 would look like a break in the long-term growth cycle, which last happened in 2002, and before that in 1985 and 1969, when the dollar lost approximately 40%, 50% and 30% from peak to trough. Under current conditions, this could mean a decline to the lows of 2008, when the DXY was close to 70, or even a move below these historical lows.

Although the outcome of policymakers' actions is difficult to predict, we assume by default that the status quo will be maintained with a recovery of the dollar's uptrend.

The FxPro Analyst Team