U.S. Dollar Faces Potential Decline as Chart Breakdown Raises Concerns

The U.S. dollar’s appeal to global investors may be diminishing as a chart breakdown warns of further losses on the horizon. Worries about a potential recession, coupled with mild inflation data, have made the dollar less attractive in the eyes of investors. The ICE U.S. Dollar Index, which measures the dollar’s performance against a basket of currencies, experienced a significant drop, breaching a crucial chart support level on Tuesday and suggesting a potential decline in the near future.

During afternoon trading, the index, also known as DXY, slipped by 1.2%, putting it on track for its lowest closing value since April 2022. The decline occurred following the release of relatively modest consumer inflation data for June, which resulted in lower Treasury yields. As a result, investors who had purchased dollars to invest in U.S. debt instruments found their returns diminishing. Furthermore, the dollar index fell below previous support levels observed in previous selloffs during February, April, and May, around the 101 level.

Janney technical analyst Dan Wantrobski pointed out that the decreasing headline inflation, combined with less attractive yield differentials between the U.S. and other countries, could lead to a weaker U.S. dollar. Additionally, the growing narrative of an impending recession adds further pressure. The dollar index had already been in a precarious technical position, struggling to regain its strength after a sharp drop at the end of 2022 and into early 2023. The failure to mount a significant recovery rally since then, coupled with its continued position below the 200-day moving average, indicates a long-term downward trend. Wantrobski highlights potential support levels in the mid-90s range and the 89-to-90 range, which were significant zones in early 2022 and the first half of 2021, respectively.