US Dollar Index Price Forecast: Bullish flag breakout lifts DXY to new yearly high

• Hot US inflation and hawkish Fed comments bolster rate-hike expectations, lifting the US Dollar Index to a new yearly high.
• A breakout from a bullish flag takes DXY higher, as an RSI reading of 63 points to positive momentum.
• Holding above 103.00 could pave the way for a move towards 104.00; initial support lies at 102.20.

Stronger-than-forecast US consumer inflation, alongside calls for further tightening from Federal Reserve (Fed) officials, is strengthening expectations of more aggressive rate rises. The US Dollar Index (DXY) has consequently reached a new year-to-date high on Wednesday, advancing for a second consecutive day.

Trading at around 102.96 at the time of writing, DXY has exceeded October’s previous yearly high of 102.94. The index measures the greenback against a basket of six major currencies.

October’s US Consumer Price Index (CPI) increased by 0.4% MoM, Tuesday’s figures showed, exceeding the 0.3% forecast but slowing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3% MoM, unchanged from September’s pace and above expectations of 0.2%. According to the CME FedWatch Tool, traders are now fully pricing in a December rate rise: the probability of a 25-basis-point (bps) increase stands at 87.1%, against 12.9% for a larger 50 bps rise.

DXY draws support from hawkish Fed signals and a flattening yield curve

The latest upside surprise in US inflation, together with policymakers’ comments, has significantly altered interest-rate expectations, according to ING analysts. They point out that the Fed’s Chris Waller “tossed a hawkish grenade into money markets early yesterday with his threat to vote for a 50bp rate hike at the 9 December FOMC meeting.” As they explain, his position was “conditioned…on the October CPI data coming in hot for the third month in a row, which it subsequently did.”

ING therefore sees the interest-rate environment as supportive of the dollar, observing that “bearish flattening of the US yield curve as the Fed takes rates into restrictive territory is normally good for the dollar against activity currencies.” Given “what could be an accelerating US labour market, core inflation well above target and a Fed ready to pull the trigger again,” the bank says it “expect[s] the dollar to stay strong and explore the top end of trading ranges over the coming weeks.” For the index, its conclusion is that “DXY should remain near recent highs and could be retesting big resistance at 102.85/103.00 sooner rather than later.”

DXY breakout leaves buyers in control

A move through the bullish flag’s upper boundary has been confirmed by the latest advance on the daily chart. With DXY also holding above its 21-, 50- and 100-day Simple Moving Averages (SMAs), the combined signals indicate that buyers retain control.

At 63, the Relative Strength Index (RSI) remains positive but has yet to reach overbought territory. Meanwhile, a marginally positive turn in the Moving Average Convergence Divergence (MACD) suggests that upward momentum is stabilising following the recent consolidation.

The first resistance level is 103, with a daily close above it potentially clearing a path towards 104 and then 105. Should the index retreat, the former upper boundary of the bullish flag provides initial support near 102.20.

Further down, the 21-day SMA at 101.97 strengthens support around the round 102 level. A more pronounced decline would bring the 50-day SMA at 101.24 into focus, close to the bullish flag’s lower boundary, before the 100-day SMA at 100.77.

(The technical analysis of this story was written with the help of an AI tool. Know more.)