US Dollar Forecast: Bullish Bias Intact

The DXY index, which measures the value of the dollar against a basket of other currencies, increased by 0.45% this week to 113.25 in advance of the weekend, helped along by a rise in U.S. Treasury rates in response to hotter-than-expected U.S. inflation statistics. Even though the annual core CPI went down from 6.3% to 6.6% in September, this is still a big increase and shows that price pressures in the economy are still high.

Even though the aggressive tightening cycle could cause a very bad recession, the Fed is likely to keep raising interest rates quickly in the coming months because inflation risks are leaning toward the upside. To be sure, policymakers appear to be emphasizing the price stability part of their job above the increasingly weakening growth profile.

For now, the “pivot theory” could be disproven if market participants discount a “more restrictive for longer” monetary policy stance and FOMC terminal rate expectations rise significantly above futures market levels. The U.S. dollar should profit from this scenario because it would maintain a positive skew in bond rates and increase the dollar’s “carry premium” relative to other major currencies.

Technically speaking, the DXY index is just below a major barrier of resistance close to 113.85. It gained ground on Friday. A break above this level in the coming sessions might signal a run for the multi-decade high at 114.77 and then 116.40, the top of a short-term rising wedge. If sellers come back and start a bearish reversal from current levels, the first support for bears is at 111.00/110.90. In the event of an additional decline, attention will turn to the 109.80 level.