US Dollar Outlook: DXY Slides During Powell's Fed Testimony

• US Dollar strength in the wake of last weeks Fed meeting continues to dissipate

• The DXY Index has fallen -0.8% from Fridays swing high as bears unwind the rally

• Federal Reserve Chair Jerome Powell vows to not raise interest rates preemptively

The US Dollar is on pace to close Tuesday‘s trading session slightly lower gauging by the broader DXY Index. This is an extension of Monday’s modest drop as US Dollar strength starts to fade with markets unwinding some of the post-FOMC rally. On balance, the DXY Index is down about -0.8% from Friday‘s swing high and has now retraced roughly one-third of last week’s trading range.

US Dollar softness over the last two trading sessions likely follows Fed Chair Powell downplaying the threat of tapering. Specifically, the Federal Reserve head undermined the importance of the latest dot plot by stating it is to be ‘taken with a grain of salt.’ FOMC officials projected two rate hikes by year-end 2023 in the dot plot, which was considerably more hawkish than what markets expected. Nevertheless, the Feds Powell just vowed during a congressional testimony that the central bank will not raise interest rates preemptively.

Powell also detailed in his prepared congressional testimony remarks how “the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” That might mean continuing to look through temporary rises in inflation while placing greater focus on achieving its full employment goals. That said, Powell mentioned during his testimony how the best way for the Fed to help ease inequality and reduce economic disparity is by focusing on its jobs mandate.

Furthermore, Fed Chair Powell acknowledged record low unemployment rates for non-white Americans as benefits of the long economic expansion into 2019. This could encourage FOMC officials to err on the side of caution by staying patient with policy while letting inflation and the economy run hot until full employment is reached. That would likely correspond with renewed bearish headwinds for the US Dollar. As such, the latest extension higher by the DXY Index might chalk up to be a mere counter-trend rally.

Shifting focus to a daily US Dollar chart highlights how the Greenback has already begun drifting lower from its recent swing high. This leaves the DXY Index searching for nearside support as US Dollar bulls aim to sustain the string of higher lows. The 200-day simple moving average and 38.2% Fibonacci retracement level stand out as technical barriers with potential to help keep the US Dollar afloat. Below this area exposes the 90.60-price zone on the DXY Index, which underpins the pre-FOMC breakout level.

US Dollar strength might resume, on the other hand, if Fed taper fears are stoked by another round of robust PMI data. Likewise, US Dollar bulls defending technical support could see the DXY Index recoil back toward its month-to-date high near the 92.50-price level. Invalidating the descending trendline that connects the 31 May and 18 June swing highs has potential to invigorate an extended US Dollar rally and bring the 93.00-handle into focus.

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