DXY sets new yearly high after bullish flag breakout: US Dollar Index price outlook

• A new yearly high for the US Dollar Index reflects stronger rate-hike expectations following hot US inflation and hawkish Fed comments.
• An RSI reading of 63 points to positive momentum as DXY clears a bullish flag pattern.
• 103.00 is the key upside threshold: a sustained break could put 104.00 in reach, with initial support at 102.20.

The US Dollar Index (DXY) posts a second consecutive daily gain on Wednesday. It reaches a new year-to-date high as stronger-than-forecast US consumer inflation and Federal Reserve (Fed) officials’ calls for additional tightening strengthen expectations of more aggressive rate hikes.

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 0.4% MoM, Tuesday’s release showed. That exceeded the 0.3% forecast, although it slowed 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. According to the CME FedWatch Tool, traders have fully priced in a December rate hike. They assign an 87.1% probability to a 25-basis-point (bps) increase and a 12.9% probability to a larger 50 bps rise.

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

The latest upside surprise in US inflation, alongside policymakers’ rhetoric, has substantially altered rate expectations, ING analysts say. 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.” That 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 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.”

103 marks the next technical hurdle

A break above the bullish flag’s upper boundary is confirmed by the latest advance on the daily chart. DXY remains above its 21-, 50- and 100-day Simple Moving Averages (SMAs), adding to the evidence that buyers retain control.

At 63, the Relative Strength Index (RSI) is positive but has not reached overbought territory. The Moving Average Convergence Divergence (MACD) has also edged into positive territory, suggesting upward momentum is stabilising following the recent consolidation.

103 provides immediate resistance. A daily close above it could bring 104 into view, with 105 the next level. Initial support lies near 102.20, where the bullish flag’s former upper boundary sits.

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

(An AI tool assisted in writing this article’s technical analysis. Learn more.)