Here’s why the US dollar is heading to $120

The US dollar index bullish momentum continued ahead of the upcoming US consumer inflation data. It surged to a high of $108.20, which was the highest point since May 2002. It has jumped by more than 53% from the lowest level since the 2008/9 crisis.

US inflation data ahead

The DXY index has jumped sharply in the past few months as investors rush to its safety. The greenback has surged against all currencies in the index. For example, the EUR/USD price crashed to parity for the first time in over two decades.

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Similarly, the USD/JPY has surged to the highest point in over 24 years as the Japanese yen has crashed. Other currencies like the Swiss franc, Australian dollar, Canadian dollar, and British pound have all crashed substantially in the past few months.

There are several reasons why the US dollar index has surged in the past few months. First, there are rising risks of a recession. As a result, most investors and businesses have moved from their local currencies to the safety of the US dollar. 

Second, the Federal Reserve has embraced a more hawkish tone in the past few months. It has hiked interest rates by 150 basis points this year and signaled that it will continue hiking. Analysts now expect that the bank will hike by 75 basis points later this month.

Third, the dollar index has risen because of the volatile European economy following Putin’s invasion of Ukraine. The index is usually more skewed to European countries.

The next key catalyst for the DXY index will be the upcoming US consumer inflation data. Economists expect the data to show that the country’s economy expanded by 8.8% in June. Since the US unemployment rate is at 3.7%, strong inflation numbers will provide a signal that the Fed will continue hiking rates.

US dollar index forecast

Turning to the monthly chart, we see that the DXY index managed to move above the important resistance level at 103.78 this month. This was an important level since the index struggled to move above it in 2017 and 2020. 

The index has jumped above the 25-month and 50-month moving averages while the Relative Strength Index (RSI) has moved to the overbought point at 82. Therefore, this bullish breakout means that the dollar index will soon rise to the next resistance at $120. This is a notable price since it was its all-time high.