US dollar index (DXY) to find strong resistance at 94.50 – ING

US dollar index (DXY) to find strong resistance at 94.50 – ING
Written by:
Crispus Nyaga
3rd August, 14:24
  • The US dollar index (DXY) is up for the second straight day as investors focus on manufacturing data.
  • Data from Markit and ISM showed that manufacturing PMI from the country expanded in July.
  • Analysts at ING believe that the index will find strong resistance at 94.50.

The US dollar index (DXY) spiked today as traders focused on the rising divisions in Washington about the next stimulus package. The greenback was up against all peer currencies that make up the index. It rose by more than 1% against the Swiss franc, 0.60% against the euro and sterling, and by 0.50% against the yen.

US dollar index
US dollar index pares back losses

Next stimulus in question as US-China tensions rise

The US dollar index rose today as investors reacted to the fears of the stimulus package that is being debated in Washington. Media reports suggest that Republicans and Democrats have failed to reach a middle ground, even as the funds in the previous stimulus run out.

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The biggest difference between the two sides is on the jobless claims cheque. Republicans have proposed to slash the weekly cheque to $200 from the current $600. They argue that the size of the cheque is making more people stay at home. Democrats want to extend the weekly cheque to January 2021.

Meanwhile, the rising tensions between the US and China has played a role in the strength of the US dollar index. Over the weekend, Donald Trump said that he would move to ban Tik Tok, the sensational Chinese social media company. Later on, he said that he supported the decision by Microsoft to buy the US version of the app.

Tensions between the two countries have been rising in recent months. Just last month, the US ordered China to close its consulate in Houston. China retaliated by closing the US consulate in Chengdu. In an interview during the weekend, Mike Pompeo, the Secretary of State warned that the US crackdown of China would continue.

US manufacturing PMI rise

The US dollar index is also reacting to the US manufacturing PMI data. According to Markit, the PMI rose to 50.9 in July, which was higher than the previous 49.8. Analysts polled by Reuters were expecting the PMI to rise to 51.3. Still, the PMI is lower than that of China, UKand the Eurozone, which is partly because the number of coronavirus cases in the US is rising.

According to Markit, output rose modestly in July as internal orders rose and export orders fell. Demand for inputs rose, employment declined, and confidence among manufacturers rose. In a statement, Chris Williamson of Markit said:

“Encouragingly, business optimism about the year ahead has revived to levels last seen in February, but many see the next few months being a struggle amid the ongoing pandemic, with a more solid-looking recovery not starting in earnest towards the end of the year or even into 2021.”

At the same time, another PMI data showed that the US manufacturing sector was upbeat in July. According to the Institute for Supply Management (ISM), the manufacturing PMI rose to 54.2 in July. That was better than the 53.6 that analysts were expecting.

This growth was boosted by manufacturing prices, which rose to 53.6 and new orders that rose to 61.5. The employment index in the sector rose to 44.3. In a statement, analysts at ING wrote:

“Yet it is a long three months until the US Presidential election and we suspect that DXY corrections may struggle to beat the 94.50 area.”

US dollar index technical outlook

US dollar index
US dollar index forecast

The US dollar index is trading at $93.78, which is its highest level since Thursday last week. On the daily chart above, the price has formed a bullish engulfing pattern while remaining below the 50-day and 100-day exponential moving averages. Also, the RSI has moved from the overbought level of 18 to the current 31. Therefore, I suspect that the price will continue rising as bulls target the next resistance at 94.50.

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