The Dollar index (DXY) has broken below the 97 psychological level for the first time since March, and is set to wrap up three consecutive weeks of declines. Having returned to pre-pandemic levels, the Dollar’s tumble is an overt sign of the risk-on stance in the markets.
The Euro had a major influence in the Dollar index’s drop, with the former accounting for 57.6 percent of the latter’s total weightage. EURUSD’s breaching of the 1.135 mark as the European Central Bank added 600 billion Euros to its stimulus package, in turn exerted downward pressure on the DXY.
The US Dollar’s decline also comes ahead of the US May non-farm payrolls due later Friday. Markets are forecasting a contraction of 7.5 million last month, which would be about a third of the jobs lost in April, while the unemployment rate is expected to breach 19 percent. Despite the carnage evident in the US jobs market, left in the wake of Covid-19, global investors have grown accustomed to this narrative since US weekly jobless claims begin soaring in the second half of March. Hence, financial markets are likely to look past today’s jobs report, barring a massive surprise in the data.
From a technical perspective, the DXY looks poised for a significant rebound, with the 14-day relative strength index (RSI) having broken into oversold territory. Previous forays below the 30 line on the RSI, most recently in December and March, subsequently led to rallies in the Greenback. However, the downward momentum was not as forceful during those two previous episodes, so it remains to be seen how much the Dollar can pare its losses amid the present risk-on environment. At least Dollar bulls can take heart from the fact that, since 2019, the DXY’s ventures below its 200-day moving average have not lasted long.
Should the US dollar continue faltering, then the 96.0 support level could be called into action once more, as was the case on the final trading day of 2019. As investors unpack the risk premiums accumulated at the height of the pandemic, the Greenback is set to unwind more of its gains from recent months, but is unlikely to capitulate in the face of the global recession expected for the year.