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DXY index forecast for 2023 amid an economic triple whammy

By:
on Dec 27, 2022
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  • The US dollar index has been in a freefall in the past few months.
  • American inflation is dropping at a relatively slow pace.
  • The economy faces a triple whammy in 2023: recession, inflation, and high rates.

The US dollar index (DXY) has plunged in the past few weeks despite the relatively hawkish Federal Reserve. It sunk to a low of $103.44 in December, which was the lowest level since June 28 this year. The DXY index has crashed by more than 9.40% from the highest level in 2022.

DXY index 2022 review

The US dollar index had a relatively upbeat performance in 2022 as global risks escalated and the Federal Reserve embraced a hawkish tone. The biggest risk during the year was the Russia’s invasion of Ukraine in February.

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There were also geopolitical risks as tensions between the United States and China escalated. Historically, the US dollar tends to do well in periods of high geopolitical risks.

The US dollar index also reacted to soaring inflation in the US and around the world. In the US, inflation peaked at 9.1% as gasoline prices surged to the highest level on record. The cost of other items like furniture, cars, and clothes also rose.

The American unemployment rate dropped to a multi-decade low of 3.7%. Therefore, the Federal Reserve decided to hike interest rates by 450 basis points. As we wrote here, the Fed pointed towards more rate hikes in the coming months.

The most recent forex news was the latest American personal consumption expenditure (PCE) index. The number showed that the country’s inflation was cooling. According to the statistics agency, the PCE deflator rose by 0.2% in November and by 4.7% from a year ago. That was a slight decline from the previous increase of 5%.

Therefore, there is a likelihood that the Federal Reserve will stop its rate hikes in 2023. Such a move will be bearish for the US dollar index. Besides, the American economy is expected to cool down in 2023. Analysts expect that the economy will face a triple whammy: inflation, interest rates, and a recession.

US dollar index forecast 2023

DXY index
DXY chart by TradingView

The daily chart shows that the DXY index has been in a strong bearish trend in the past few weeks. In this period, it has managed to move below the 38.2% Fibonacci Retracement level. It has also moved below the 50-day and 200-day moving averages. It is also attempting to form a death cross, which happens when the two MAs make a crossover.

The Relative Strength Index (RSI) has also moved close to the oversold level. Therefore, the index will likely continue falling in 2023 as sellers target the next key support at $95, which is the 78.6% retracement point.