DXY: Will the US dollar index crash as Morgan Stanley predicts?

The US Dollar Index (DXY) has moved into a correction after falling by 10% from its highest point this year, and Morgan Stanley believes it has more downside to go in the next few months. 

Morgan Stanley is bearish on the US dollar index

Analysts at Morgan Stanley are pessimistic on the US dollar index. In a note sent to clients on Monday, they expect it to plunge by another 9% to $91, as we predicted a few weeks ago.

The analyst cited the ongoing demand for foreign currencies as the trade war between the US and other countries escalates. In a statement on Monday, China said that the US had violated the terms of the last trade agreement reached in Switzerland. 

The government cited the recent export control of chips and aircraft parts from the US to China. It also cited the recent announcement that the US would single out Chinese students in its universities.

The statement came after Trump also warned that China was violating terms of its trade deal by barring exports of rare earth minerals. This escalation means that it will be difficult for Donald Trump and Xi Jinping to have direct talks soon. In a note, analysts at Morgan Stanley said: 

The US dollar index has also crashed amid rising tensions between the US and the European Union. Trump recently warned that he would implement a 50% tariff on European goods. While these tariffs have been delayed, there are chances that they will go on in July as he fights the “Trump Always Chickens Out” claim.

ECB decision and US nonfarm payrolls data

The next key catalyst for the US dollar index will be the upcoming European Central Bank (ECB) decision. Analysts anticipate that the bank will cut interest rates by 0.25% in this meeting and then deliver a final one later this year.

ECB decision has an impact on the US dollar index because the euro is its biggest constituent.

The other important catalyst to watch will come out on Friday when the US publishes the latest nonfarm payrolls (NFP) data. Analysts believe that the labor market held steady in May, even as companies dealt with the fallout.

While the labor market is important, analysts expect their impact on the Federal Reserve will be limited since the Fed is not expected to cut rates soon.

DXY Index Technical Analysis

US dollar index chart | Source: TradingView

The daily chart shows that the US dollar index has plunged in the past few months. This sell-off happened after it peaked at $110.10 in January. 

It has formed an inverse cup-and-handle pattern, a popular bearish continuation sign. This cup has a depth of about 9%, and the recent rebound was part of the formation of the handle section. 

Therefore, the index will likely continue falling as sellers target the next key support at $90.96. This target is established by measuring the cup’s depth from its lower side. A move above the resistance point at $102 will invalidate the bearish outlook.