Market pullback halts the Dollar’s fall

The Dollar has halted its decline near 7-week lows in the DXY index amid a pullback in stock indices from recent highs. The 0.4% DXY rise from intraday lows on Tuesday was the strongest in this month, which shows well how much the Dollar was pressured during this period.

Demand for the Dollar intensified due to a corrective pullback in key equity indices. The Nasdaq lost around 1% over Tuesday, reinforcing the retreat from the historic highs reached late last week.

It is important for traders now to determine how long the pullback may last. To do so, let’s look at some indirect indicators.

The VIX, so-called fear index, fell to 16.25 last Friday, a low of 14 months before its blip to 18.2 now. Often its shallow values are seen as a sign of market complacency, foreshadowing a sell-off. However, the turning point in recent history has been near 10, which is markedly lower than recent figures. The current surge will likely prove to be short-lived, and there is still room for a decline.

The Euro and the Pound have slowed down their gains against the Dollar near significant round levels. However, it looks more like a brief technical correction to recharge the bulls than the exhaustion of the rally. EURUSD and GBPUSD remain above the 50 and 200-day averages, signalling a bullish trend.

USDCNH is developing a decline despite the Dollar’s attempts to add to the European currencies. This currency pair is less exposed to market noise, clearly indicating that pressure on the Dollar has been restored after a two-month pullback.

Gold is also developing its gains, building on April’s rising trend.

The pressure on stock markets and the associated slight increase in dollar pull towards several European currencies may be due to investors’ desire to lock in profits by the end of April. Something of an attempt to front-run the proverb “sell in May and go away”. Trading volumes on exchanges have fallen by a quarter from the average levels of previous months, marking the possible start of the summer lull. Simultaneously, a period of reduced activity does not promise a broken trend but will only make the current trends more sluggish.

The FxPro Analyst Team