Dollar Index (DXY) Eyes Deeper Recovery with USD/CHF at 12-Year Lows

DOLLAR INDEX, USD/CHF PRICE, CHARTS AND ANALYSIS:

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US DOLLAR BACKDROP

The US Dollar and Dollar Index (DXY) has been hovering around last week’s lows for the majority of the week thus far before edging higher today above the 100.00 mark. Mixed data out of the US yesterday coupled with positive US earnings by and large has seen the dollar remain supported. Surprising though as I would have expected further selling pressure on the USD should equities continue their advance.

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June’s headline retail sales data came in below estimates yesterday, however it is important to note that the control group which excludes volatile components came in above forecasts, with a print of 0.6% MoM. Industrial production was the concern however, falling more than expected MoM providing further evidence of a slowdown in the US economy.

At the moment we are seeing sigs across the board of a slowdown in the US economy with US employment data the last point of contention. Unemployment improved over the past month with a 0.1% decrease back to 3.6% with average hourly earnings remaining robust. Market participants will no doubt have noticed the similarities between developed economies with the UK in particular struggling with wage growth as well.

As attention slowly begins to shift to next week FOMC meeting markets appear resigned to a 25bps hike by the Fed with the majority of that priced in already. More important to the DXY direction moving forward is actually where market participants see rates peaking from the US Federal Reserve with some of the opinion that a July hike will be the last hike of the current cycle. We have seen constant repricing of probabilities in this regard with markets growing ever more sensitive to data releases the closer we get to the Feds peak rate. Following once of the most aggressive hiking cycles in history are we really approaching the end? Only time will tell.

USD/CHF OUTLOOK

The Swiss Franc has been on an impressive run against the greenback which stretches back to November 2022 when USD/CHF traded just above the 1.0000 level. Since then, the pair has been on an aggressive decline currently trading at levels last seen in 2011 (discounting the 2015 spike). A large portion of the move has been down to the haven appeal of the Swiss Franc as market participants feared a recession may be on its way in the second half of 2023. Comments from the Swiss National Bank (SNB) regarding potential FX intervention had also added further to the franc and its continued resilience in 2023.

It will be interesting to see how this pair develops from a macro standpoint moving forward as the potential for a ‘soft landing’ (which should see risk-on sentiment rise) grows. Having said that the Dollar is also expected to face selling pressure as it has largely benefitted from safe haven appeal as well with market participants likely to pivot back into equities should the overall environment continue to improve. Are we in for an extended period of consolidation in USDCHF for the remainder of 2023? We will take a closer look at the technical which might give us a better picture.

ECONOMIC CALENDAR

There is not a lot left this week in terms of high impact risk events on the calendar from a USD perspective. Later today we do have US building permits before CB Consumer Confidence and the FOMC meeting both due next week. Once again it will not be the rate decision that holds the key but rather the comments by Fed Chair Powell as well as any updates on the Fed projections for the rest of the year.

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TECHNICAL OUTLOOK AND FINAL THOUGHTS

US DOLLAR

DXY Daily Chart

Source: TradingView, prepared by Zain Vawda

Looking at the Dollar Index and last week’s dally candle close below the 100.00 mark for the first time since April 2022. However, bears have failed to push on since with a test of the lows around 99.60 taking place yesterday before bulls took control pushing the index to a fresh weekly high. I would like to see a retest of key resistance around the 100.84 mark before a continuation of the bearish move to the downside. Given the lack of high impact data this week I do believe such a move is likely to materialize with a break and candle close above the 100.84 handle opening up the possibility of a deeper retracement toward the 102.00 handle.

USD/CHF

USDCHF Daily Chart

Source: TradingView, prepared by Zain Vawda

Looking at the technical picture on USDCHF and we are trading at 2011 lows (if we ignore the 2015 spike). The daily chart and selloff over the last 10 days or so almost mirrors that of the DXY which continues to be the driving force behind the pair.

On the daily timeframe we are seeing a bit of consolidation around the 0.8600 mark with the RSI (4) hovering in overbought territory as well. A continued recovery in the DXY could facilitate a retest of the key support turned resistance area around the o.8750 mark. Similar to the DXY a candle break and close above 0.8750 could facilitate a run up to the recent swing highs around the 0.9000 area which lines up with the 100-day MA.

Taking a look at the IG client sentiment data and we can see that retail traders are currently net LONG on USDCHF with 88% of traders holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment meaning we could see USDCHF prices continue to decline following a short upside rally.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda