US dollar forecast:
- the U.S. dollaras measured by the DXY Index, is falling on Monday, extending Friday’s losses after weaker-than-expected US employment data.
- US dollar / Japanese yen It is also deepening its decline, and steadily approaching Fibonacci support near 140.92
- All eyes will be on us economic inflation This week’s report
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Most read: EUR/USD holds post-payroll gains, market weighing chances of higher interest rates
The US dollar, according to the DXY index, fell slightly on Monday, extending losses from last Friday after the lower-than-expected non-farm payrolls number. There were no major catalysts at the start of the new week, but traders were somewhat cautious ahead of Wednesday’s major economic release: the latest US Consumer Price Index report.
Core CPI for July is expected to have increased 0.3% m/m, bringing the annualized rate to 3.1% from 4.0% previously, a solid improvement in trend. The core gauge is also expected to rise 0.3% month over month, but the 12-month reading is expected to remain fairly flat, only declining to 5.0% from 5.3% in May.
Incoming economic data for the United States
source: DailyFX Economic Calendar
Traders should keep a close eye on the inflation figures to get an insight into the Federal Reserve’s monetary policy roadmap and the potential path for the US dollar.
The included report wouldn’t be enough to discourage bets on another quarter-point increase at the July FOMC meeting, but it would be enough to prevent expectations of continuing to turn in a more hawkish direction. In this context, the latter case may be somewhat bearish for the US currency.
On the flip side, if the data surprises higher by a wide margin, interest rate expectations could become more aggressive, prompting traders to tighten further after this month. This could mean another 25 basis point increase in September. Should this scenario occur, the US dollar is likely to rally against the majors, especially against lower-yielding currencies such as the Japanese yen.
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Technical Analysis in USD (DXY)
After Monday’s decline, DXY is hovering above the important support level near the psychological level of 102.00. If sellers can push prices below this floor, we should see a move towards 2023 lows around 100.75. On further weakness the focus moves to 99.50.
On the flip side, if buyers regain control of the market and trigger an upward shift, initial resistance comes in at 103.25, a key technical barrier created by a medium term downtrend line extending from the September 2022 highs. If this ceiling is lifted, the USD could head Towards the 200-day simple moving average.
USD Technical Chart (DXY)
US Dollar (DXY) chart created using TradingView
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Technical analysis of the USD/JPY pair
The US dollar has weakened sharply against the yen in recent days. However, this decline may be part of a temporary correction rather than a trend reversal, as the dollar maintains a constructive outlook against its Japanese counterpart.
When an asset rises quickly and becomes overbought, it is vulnerable to a healthy drawdown as traders who took long positions start dumping them to lock in profits. This could be poignant now, after USD/JPY rose nearly 3.5% in June.
With the pair still biased to the upside for the time being, the weakness may soon fade. The daily chart shows that the recent decline appears to see the exchange rate approaching an important support level near 140.92, which corresponds to the 23.6% Fibonacci retracement of the January 2023/June 2023 advance.
USD/JPY is likely to establish a base around 140.02 before resuming its upward trajectory, and the bulls are likely to target 142.50 first, followed by the psychological level of 145.00. Conversely, if prices extend declines and push below 140.92 decisively, selling pressure is likely to increase, paving the way for a possible move towards 139.00.
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