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DXY index forecast as US dollar forms shooting star

on Oct 3, 2022
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  • The DXY index has jumped in the past four months straight.
  • It rallied as global risks continued rising in September.
  • The Fed decided to continue hiking its interest rates.

The US dollar index (DXY) has been in a strong bullish trend in the past few months. It has risen in the past four months straight and is now trading at the highest level since May 2001. The index has surged by more than 16% this year and is about 25% above the lowest point in 2020.

USD September review

The US dollar index is an important gauge that measures the performance of the greenback against a basket of currencies. It is made up of key currencies like the euro, sterling, Japanese yen, and Swiss franc among others. 

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In most cases, the US dollar index tends to rally in periods of high risks. This explains why the index has surged to the highest point in more than 20 years this year. There are growing risks of nuclear war as Russia comes under fire in Ukraine. 

Most importantly, there are risks of a global recession as central banks hike interest rates. In the United States, the Fed has managed to hike interest rates by 300 basis points this year. Elsewhere, in Europe, important banks like the ECB, Swiss National Bank, Riksbank, Bank of England (BoE), and Norges Bank continued hiking rates in September and vowed to keep hiking.

With bond yields surging, there are high risks that the global economy will sink into a recession. At the same time, there are concerns about the financial sector as Credit Suisse crisis mount.

In October, the US dollar index will react to the ongoing events in the global economy. More millitary activity in Ukraine and the threat of nuclear weapon could lead to more gains. With the Fed and the Bank of England not meeting, focus will be on other key central banks like the ECB, Bank of Canada, and Bank of Japan.

DXY index forecast

dxy index

The US dollar index continued its bullish trend as I wrote in my last article. As it rose, it managed to move above the important resistance level at $103, which was the highest level since March 16. The index has remained above all moving averages while the Relative Strength Index (RSI) moved above the overbought level.

Therefore, there is a likelihood that the US dollar index will take a breather now that it has formed a shooting star pattern. In price action analysis, this pattern is usually a bearish sign. If this happens, the next key support level will be at $105.

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