DXY price forecast after strengthening two weeks in a row

The trading week is not over yet, and anything is possible in the hours left until the end of the day. Nevertheless, the Dollar index’s (DXY) resilience is one to notice, especially this week.

Participants in the currency market should know that most of the data that should surprise the markets is already priced in. After all, this is the very definition of market efficiency.

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This week brought us two perfect examples of why this is the case.

First, it was the Reserve Bank of Australia on Tuesday. The central bank down under hiked the cash rate by 50bp instead of the 25bp expected.

Hence, if anyone would have expected 50bp, betting on the Australian dollar should have paid hefty profits. Only it did not.

After a quick and short-lived spike, the Australian dollar gave away all its gains (and some more) away.

Second, the European Central Bank announced the end of its easy policy yesterday. So, again, after a spike that proved to be short-lived, the euro gave up all its gains (and some more) away.

Sure enough, one can look at the two central banks’ monetary policy statements and, in the case of the ECB, press conference too, to find the possible reasons for the sharp reversals. But the simple explanation is that the FX market always focuses on the next event.

What is next? Today is the CPI or inflation release in the United States. And then, next Wednesday, the all-important Federal Reserve meeting.

US dollar gained despite RBA and ECB being hawkish

Because the US dollar is the world’s reserve currency, what happens with the US interest rates matters the most to market participants. And here, we should include not only FX market participants but everyone with interest in financial markets.

According to its guidance, the Federal Reserve will raise the funds rate by yet another 50bp next Wednesday. And it will do so again at the meeting that follows.

But it won’t stop until inflation cools down. Today, the market participants find out if inflation is, indeed, cooling down.

Judging by the resilience of the US dollar this week, the market is not convinced inflation has peaked (yet). Hence, a higher CPI print today than it is already priced in may trigger another leg higher in the US dollar.

How come?

The explanation lies in the paragraphs above – the Fed will not rest and will keep on tightening until it sees the desired result.

To sum up, the Dollar index’s bounce from horizontal support this week shows investors being uncertain about inflation peaking in the US. If they are right, then the Dollar index is poised to make another higher high.