DXY forecast as the US dollar index pulls back

The US dollar index (DXY) price remained in a consolidation mode as investors focus on the next actions by the Federal Reserve. It was trading at $106.50, where it has been this week. This price is also about 5.85% below the highest level this month.

Will the Federal Reserve pivot?

The DXY index has been under pressure in the past few weeks. The sell-off accelerated after the US published the latest consumer and producer price index data.

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According to the Bureau of Labor Statistics (BLS), the headline consumer price index (CPI) dropped from 8.3% in September o 7.7% in October. The decline was bigger than what analysts were expecting. It also provided hints that inflation has peaked.

Additional data published this week showed that the country’s producer price index (PPI) also continued dropping. Therefore, most analysts expect that the Federal Reserve will start pivoting in the coming months.

The pivot will see the Fed reduce the size of its interest rate hikes. Most economists believe that the Fed will hike interest rates by 0.50% in the December meeting followed by several 0.25% increases in 2023. The Fed has already hiked rates by 400 basis points this year.

Several Fed officials who talked this week seem to be supportive of a Fed pivot. For example, officials like Loretta Mester and Mary Daly believe that the bank will talk more about pivoting in its December meeting. Some, however, remain adamant that more jumbo hikes are needed.

The US dollar index also declined after other forex news pushed its constituent currencies higher. For example, the euro, British pound, and Japanese yen rose sharply after they published strong inflation data. As we wrote in this article, UK’s inflation jumped to a 41-year high of 11.1% in October.

DXY index forecast

US dollar index chart by TradingView

The four-hour chart shows that the US dollar index has been in a strong bearish trend in the past few weeks. This chart is a renko, which is unique than candlesticks because it focuses on an asset’s price. It has moved below the important support level at $109.82, the lowest level on October 26.

The index has moved below the 50-day moving average while the Relative Strength Index (RSI) has moved below the oversold level. Therefore, the outlook for the index is bearish, with the next key support level being at $105.