DXY index: US dollar analysis after hitting a 5-week high

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on May 15, 2023
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  • The US dollar index has jumped to the highest point in more than 5 weeks.
  • Concerns about the US government defaulting have eased slightly.
  • The US will publish the latest retail sales numbers on Tuesday.

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The US dollar index (DXY) index jumped to the highest point in five weeks as concerns of the debt limit crisis eased. The DXY jumped to a high of $102.61, which was much higher than the year-to-date low of $100.75.

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US dollar recovery continues

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The DXY index had one of its biggest weekly gains last week even as the debt limit crisis continued. A meeting between Joe Biden and Kevin McCarthy ended without a deal. And a follow-up meeting scheduled on Friday was postponed. 

On the positive side, Lael Brainard, the head of the National Economic Council (NEC) said that the talks between the two sides were positive. Therefore, because of the risks involved in defaulting, there is a likelihood that the two sides will reach an agreement soon,

The next key USD news will be the upcoming retail sales scheduled for Tuesday this week. Economists expect the data to show that the country’s retail sales bounced back in May as inflation eased across the board. 

Data published last week showed that the headline consumer price index (CPI) dropped from 5.0% in March to 4.9% in May. Core inflation, which excludes the volatile food and energy products, declined from 5.6% to 5.4% in April.

The other key catalyst for the US dollar index will be the performance of regional banks. The closely-watched SPDR Regional Banking ETF (KRE) has crashed by over 41% in the past three months and by 15% in the past 30 days. 

This trend is a sign that many traders expect that more regional banks like PacWest and Western Alliance Bancorp will go under. These banks joins other companies like First Republic Bank and Silicon Valley Bank that have defaulted.

US dollar index forecast

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US dollar index

DXY chart by TradingView

Technically speaking, the DXY index found a strong support $100.87, where it has struggled to move below in the past few months. This explains why the index has drifted upwards in the past few days. The dollar has moved slightly above the 50-day moving average while the Relative Strength Index (RSI) has moved above 50.

Therefore, I suspect that the dollar index will continue rising as buyers target the next key resistance point at $103.50. In the near term, however, the index will likely crash below the psychological level at $100. A move above the key resistance point at $104 will invalidate the bearish view.

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