US dollar index (DXY) forecast as the sell-off gains steam

The US dollar index (DXY) continued its freefall as bets of Fed rate cuts continued rising. It slipped to a low of $101.31, its lowest point since July last year. It has been in a severe downward spiral after peaking at $107.35 on October 3rd.

US bond yields retreat

The DXY index retreat has coincided with the ongoing downtrend of America’s bond yields. According to Investing, the 10-year yield has dropped to 3.84%, its lowest level since July. 

Similarly, the 30-year yields have retreated below the crucial support at 4% for the first time in months. As a result, the spread between the 10-year and 2-year bond yields has widened to over 46 points.

The dollar index sell-off has also coincided with the sharp decline of the VIX index, which has fallen to $12.98. The VIX, which is popularly known as the fear gauge, has dropped by more than 50% from its highest point in 2023.

This performance is mostly because of the ongoing hopes that the Federal Reserve will embrace a dovish tone in 2023. This case has been emphasised by the recent encouraging data from the United States.

The data revealed that the headline and core PCE numbers continued their downtrend in November. This is important because these numbers are the Fed’s favourite inflation metrics. Another report earlier this month showed that the headline Consumer Price Index (CPI) data dropped to 3.1% in November. 

In its final monetary policy meeting of the year, the Fed pointed to three rate cuts in 2024. Now, most economists believe that these cuts will start in the first quarter of the year since the economy is slowing. 

Other central banks will also start cutting in 2024 since their economies are doing worse than in the US. In Europe, inflation has moved closer to the ECB’s target of 2.0% while most economists believe that the economy has moved into a recession. Similarly, the UK is doing much worse, with the economy contracting in October and inflation retreating.

US dollar index forecast

DXY chart by TradingView

The daily chart shows that the DXY index has been in a strong downtrend in the past few weeks. It has remained below the 50-day and 25-day Exponential Moving Averages. Most recently, the index crossed the key support at $102, its lowest point on November 29th.

The MACD indicator and its histogram has remained below the neutral level while the Relative Strength Index (RSI) is nearing the oversold level. Therefore, the outlook for the index is bearish, with the next point to watch being at $100.