Is this the end of the US dollar index (DXY) rally?

The US dollar index (DXY) rally faded this week as geopolitical risks ease. The index, which peaked at $106.50 last week, has retreated to $105.85 as traders wait for the crucial US GDP and PCE numbers. 

US GDP and PCE data

The DXY index has pulled back in the past few days as investors focused on the actions by Israel and Iran. After Iran attacked Israel earlier this month, Israel made a mild response last week after coming under pressure from the Biden administration. 

Therefore, there are signs that the crisis will not escalate, which explains why the price of crude oil and precious metals have retreated. Brent and West Texas Intermediate (WTI) retreated to $88 to $83, respectively. Gold and silver have all dropped to $2,335 and $27.

The index has also crashed as investors assess the next actions by the Federal Reserve. Earlier this year, the consensus was that the Fed would deliver over 6 interest rate cuts starting from March. 

Now, there are signs that the Fed will not cut rates since inflation has remained at an elevated level. The most recent data showed that the headline and core Consumer Price Indexes (CPI) rose to 3.5% and 3.8%, respectively.

The Fed has no reason to cut interest rates since inflation remains high while the economy is doing well. 

As such, the next two days will be important for the US economy as the US will publish the latest personal consumer expenditure (PCE) data. Economists polled by Reuters expect the data to show that the economy expanded by 2.5% in the first quarter after growing by 3.5% in Q4’23. 

If these estimates are accurate, they means that the US has expanded by over 2% for seven straight quarters. This recovery is mostly because of the stimulus packages that Biden and Trump have implemented in the past five years.

The US will next publish the crucial PCE inflation figure on Friday. Economists see the headline PCE coming in at 2.6% while the core PCE rising to 2.6%. If these numbers are correct, it means that the Fed will embrace a restrictive policy for a while.

US dollar index forecast

DXY chart by TradingView

The daily chart shows that the DXY index has been in a strong bull run in the past few days. It has now formed a golden cross pattern, which happens when the 200-day and 50-day Exponential Moving Averages (EMA) cross each other. 

The US dollar index has remained above the crucial support at $104.97, its highest point on February 14th. It has also formed a small bullish flag pattern. Therefore, there is a likelihood that the US dollar index will continue rising as buyers target the important resistance at $107.35, its highest point in October last year.