US Dollar Forecast: DXY Hits Multi-Month High as Oil Drives Inflation Fears

Dollar Index Hits Multi-Month High as Oil and Inflation Fears Drive the Rally

The U.S. Dollar Index (DXY) is trading higher on Monday after touching its highest level since November 28 earlier in the session before pulling back slightly. The new multi-month intraday high could serve as a key trigger point for an acceleration to the upside later in the session. The major upside target is the November 21 main top at 100.395.

Trend Is Up but Momentum Is Weak

The trend is up based on the swing chart and the moving averages, however, momentum is weak with the index essentially consolidating inside its five-day range. The price action indicates the psychological 100-level is being defended fiercely. Taking out this level with conviction could create the upside momentum needed to challenge and eventually breakout over 100.395.

Key Support Levels Holding the Trend in Place

One sign of strength today is holding above the breakout trend line at 98.648. A failure at this angle will weaken momentum but not the trend. The trend is well supported by the 200-day moving average at 98.343 and the support cluster formed by an uptrend line at 98.051 and the 50-day moving average at 97.989.

Waiting for the Next Catalyst

Five days of consolidation clearly shows that traders are not buying strength. The question is, will they be patient enough to hold on for the next catalyst to fuel the upside breakout? If they lose patience then look for a pullback into support and wait and see if traders switch to “buy the dip” mode.

One thing for certain that I’ve learned over time is that the longer a market consolidates inside a narrow range, the greater the chances of a major breakout or breakdown. It appears that lines in the sand have been drawn, now it’s likely up to the headlines to be the catalyst that brings back the momentum.

Oil Is Pulling the Dollar’s Strings

That catalyst could be renewed strength in the oil market because dollar movement has been closely correlated to crude movement lately. The dollar jumped earlier today when crude surged to near $120 and the greenback pulled back from its earlier high when oil retreated about $10 from its intraday peak.

This Rally Is About Inflation Fear, Not Safe-Haven Demand

Although the U.S. Dollar is considered a safe-haven asset, I don’t think the current rally is being primarily driven by that notion. Instead, I’m seeing a rally fueled by fear of inflation and slower economic growth, and concerns over future rate cuts. Furthermore, you can also throw bullish Treasury yields into the mix.

I also think traders, fearing further weakness over a prolonged period, are shedding risky assets like gold and stocks as they await the unfolding of events in the Middle East. Questions dollar traders are asking and reacting to include how long will the war last, how long will crude oil stay above $100 and how long will it take for everything to return to normal. Any answer that includes prolonged will likely be bullish for the dollar because it will probably delay any chances of a Fed rate cut.

More Information in our Economic Calendar.