DXY holding in on a 23.6% Fibo retracement, ECB in focus

• US dollar has moved back to more respectable levels.
• ECB is the next major risk for markets and the DXY.

We are seeing some strength back into the US dollar to a correction target of 96.30s, as suggested in yesterday's analysis: DXY: It may only be a matter of time when US dollars are back by popular demand

The DXY is currently trading at 96.27 at the time of writing, having travelled from a low of 95.23 to a high of 96.33 on the day so far as the market starts to fret about liquidity concerns, consider a rate cut from the European Central Bank and a US economy in healthier shape than many.  

The greenback lost its safe-haven benefit following the market's reaction to the Federal Reserve cutting its interest rate in an inter-meeting emergency event which shaved 50 basis points of the interest rate, leaving the door wide open for further policy action on the 18th March and again in April's meeting. US yields have been in free-fall to the lowest levels on record across the curve.

The question from here is whether the Fed is going to want to be seen to support the US stock market as benchmarks head towards official bear trend territory with benchmarks almost 20% lower. The price of oil is also going to be a spanner in the works for the Fed, it too has dropped significantly to the point where deflation is back on the cards while some have expectations of a fresh round of QE.

US data will be back in vogue this week following last week's encouraging Nonfarm Payrolls. This week, we have the US Consumer Price index. While data has been somewhat ignored over the last week, it will not continue to be so as it will underscore a line under the strength of the US economy in comparison, to say, the eurozone's, and that should be supportive of the US dollar. However, considering the oil price, markets could well be giving the CPI less attention at this juncture, expecting lower gas prices over the coming months. 

All eyes on ECB

The major event for the DXY due to its weighting to the euro, will be this week's ECB.  "It is still our central view that the Eurozone will fall into recession this year, with Italy set to lead the pack lower. In order to stanch the wounds we do expect the ECB to cut its discount rate by another 10 bps at this week’s policy meeting and also to announce targeted liquidity measures," analysts at Rabobank argued.

"While this policy may support the medium-term outlook for the Eurozone economy, they are likely to weigh on the EUR in the near-term. We see scope for a near-term retracement back towards the EUR/USD1.1220/30 area which represents the late December high."

DXY levels