US Dollar Forecast: DXY Tests Trendline as Ceasefire Hopes Weigh

Dollar Index Tests Key Trendline as Ceasefire Talk Weighs on Safe-Haven Demand

The U.S. Dollar Index (DXY) is edging lower late Monday with the market starting to show signs of weakness as traders appear to be squaring long positions. The price action suggests we may be nearing a key inflection point with players weighing the possibility of a ceasefire between the United States and Iran against a potential escalation of the war if certain criteria like the opening of the Strait of Hormuz isn’t met.

Technical Outlook

Technically, the trend is up, judging from the position of the three-month trend line, the swing chart and the moving averages.

The trend line is currently being tested. It is at 99.768 on Monday, pretty close to the session low at 99.757. The daily chart shows that a failure to hold the current rally could flip the index to the bearish side, especially a close under it.

If the trend line is taken out with conviction, the next target will be the nearest swing bottom at 99.298. Taking out this level will change the main trend to down. The daily chart indicates there is plenty of room to the downside, once the trend turns. The next target area, the 200-day moving average at 98.457 and the 50-day moving average at 98.444, is the most important area on the chart.

Traders are watching the 50-day and 200-day moving averages closely because the latter is climbing and getting ready to cross to the bullish side of the shorter MA. Does this mean the long-term trend is getting stronger or the short-term trend is getting weaker? We do know it is an area to be watched because a moving average crossover is often accompanied by heightened volatility.

On the upside, taking out today’s high at 100.286 could stabilize the index enough to take a shot at the multi-month top at 100.643.

Oil, Inflation and the Fed Are Running the Dollar Right Now

The greenback is stuck between inflation risk and growth concerns as the Iran war drives oil above $100. Higher energy prices are pushing inflation expectations higher and rate cut expectations keep getting pushed further out. Some forecasts are already pointing to 2027. That keeps yields elevated and the dollar supported.

Mixed U.S. data is capping the upside though. The dollar isn’t running away to the upside because the economic picture isn’t clean enough to justify it.

The near-term comes down to one thing. If there’s a ceasefire, oil drops, inflation cools and the dollar weakens. If the war escalates, oil goes higher, the Fed stays tight and the dollar catches a bid on both yields and safe-haven demand.

More Information in our Economic Calendar.