US Dollar Forecast: DXY Gains as Oil Surge and Iran Risk Lift Dollar

U.S. Dollar Index Pushes Higher as Middle East Risk Brings Safe-Haven Demand Back

The U.S. Dollar Index is catching a bid late Thursday and the reason is straightforward. The Middle East situation deteriorated and traders went back to the dollar. That’s the whole trade right now. Keep reading for the key levels and what needs to happen to turn this into something more than a short-term bounce.

Technical Outlook

The U.S. Dollar Index is trading higher late in the session on Thursday as traders navigate through the key moving averages. After finding support last week at 97.632 inside the 98.097 to 97.496 retracement zone, the index is in a position to close out the week with a solid gain.

At 19:33 GMT, DXY is trading 98.806, up 0.200 or 0.20%.

DXY is currently trading inside the 50-day moving average at 98.834 and the 200-day moving average at 98.530. This suggests an imminent breakout.

Taking out the 50-day MA with conviction could trigger an acceleration into the short-term retracement zone at 99.138 to 99.493. A break back under the 200-day MA could lead to a retest of the 98.097 to 97.496 retracement zone.

Despite this week’s gains, the trend is still down. This move is being fueled by last Friday’s closing price reversal bottom at 97.632. Typically, this chart pattern leads to a 2 to 3 day rally equal to 50% to 61.8% of the recent break. So we’re not expecting a major breakout yet.

The minor top is 99.183 and the major top 100.643. If buyers take out 99.183, the minor trend will change to up and momentum will shift to the downside, however, unless it can breakout over the 61.8% level at 99.493, the rally is likely to die inside the short-term retracement zone.

Our short-term forecast is neutral-to-bearish with 98.07 our potential floor and 99.138 our expected ceiling. This type of set up usually indicates a cautious trade with traders waiting for more clarity.

Middle East Risk Flipped the Switch

Iran seized two ships in the Strait of Hormuz and peace talks went nowhere even after Trump extended the ceasefire. That combination put the risk premium back in the market fast. Spot Brent Crude Oil pushed above $100 and traders stopped betting on a calm resolution. The dollar is the place they go when that happens and that’s exactly where the money went Thursday.

The U.S. Dollar Index is on track for its first weekly gain in a month. That tells you how quickly sentiment shifted. A week ago traders were fading the dollar on ceasefire optimism. Thursday they were adding to dollar positions because the optimism didn’t hold up.

Other Currencies Feeling the Pressure

The euro dropped to $1.1682 for its first weekly loss in four weeks. The British pound slipped to $1.3464. The Japanese yen is sitting near 159.74 and getting close to the 160 level where intervention talk starts picking up. When you see broad weakness across that many majors at the same time the dollar bid is real, not just a short squeeze.

Rate Expectations Shifted Too

Markets are now pricing only a 25% chance of a Fed rate cut this year. Spot Brent Crude Oil above $100 keeps inflation risk elevated and the Fed doesn’t cut into that. Europe is moving in the other direction with rate hike talk still alive over there. That’s two forces working against the dollar’s longer term trend but supporting it right now.

What to Watch

Geopolitical risk stays elevated and dips in the U.S. Dollar Index are going to find buyers. That’s the trade as long as the Strait situation stays unresolved and oil holds above $100. The technical picture says this rally has a ceiling around 99.138 to 99.493 unless something changes fundamentally. Right now nothing is changing.

More Information in our Economic Calendar.