US Dollar Index Price Forecast: Can DXY extend gains after bullish flag breakout drives fresh yearly high?

• Rate-hike expectations push the US Dollar Index to a new yearly high, driven by elevated US inflation and hawkish Fed commentary.
• Positive momentum accompanies DXY’s breakout from a bullish flag, with the RSI standing at 63.
• With initial support at 102.20, a sustained move above 103.00 could pave the way towards 104.00.

Bets on more aggressive rate hikes lift the US Dollar Index (DXY) to a new year-to-date high on Wednesday, extending its advance for a second consecutive day. The gains follow stronger-than-expected US consumer inflation and calls for additional tightening from Federal Reserve (Fed) officials.

Trading near 102.96 at the time of writing, DXY has moved past the previous yearly high of 102.94 recorded in October. The index measures the Greenback against a basket of six major currencies.

A December rate hike is now fully priced in by traders, with the CME FedWatch Tool indicating an 87.1% probability of a 25-basis-point (bps) increase and a 12.9% probability of a larger 50 bps rise. Tuesday’s data showed that the US Consumer Price Index (CPI) increased 0.4% MoM in October, exceeding the 0.3% forecast, although easing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3% MoM, unchanged from September’s pace and above the 0.2% forecast.

Can a hawkish Fed and yield-curve flattening sustain DXY’s strength?

The latest upside surprise in US inflation, alongside policy commentary, has significantly altered rate expectations, according to analysts at ING. They note 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.” His position, they add, was “conditioned…on the October CPI data coming in hot for the third month in a row, which it subsequently did.”

ING sees this interest-rate environment as supportive of the Dollar, explaining 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.” Citing “what could be an accelerating US labour market, core inflation well above target and a Fed ready to pull the trigger again,” the bank states that it “expect[s] the dollar to stay strong and explore the top end of trading ranges over the coming weeks.” For the index, its assessment is that “DXY should remain near recent highs and could be retesting big resistance at 102.85/103.00 sooner rather than later.”

Technical outlook: Can DXY extend its breakout?

Bulls appear to retain control on the daily chart, where the latest advance confirms a break above the bullish flag’s upper boundary. DXY is also holding above its 21-, 50- and 100-day Simple Moving Averages (SMAs), reinforcing that view.

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

A daily close above immediate resistance at 103 could clear a path towards 104 and then 105. Should the index retreat, the first support lies around 102.20, corresponding to the bullish flag’s former upper boundary.

Further down, the 21-day SMA at 101.97 strengthens support around the round number of 102. A sharper correction would bring the 50-day SMA at 101.24 into focus near the flag’s lower boundary, ahead of the 100-day SMA at 100.77.

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