DXY: US dollar index upside correction has peaked

The US dollar index (DXY) strong upward correction may be about to peak. Analysts at ING, a leading European banking group, warned that the rebound may struggle to find more upside in the coming weeks. The DXY index rose to a high of $104.6, the highest point since January 5.

ING warns on the US dollar

The US dollar index has made a strong recovery in the past few days as investors hit the great reset. A reset happens when the market adjusts its expectations on key issues. In this regard, the reset was about the next actions by the Federal Reserve.

Investors were encouraged by December’s inflation numbers, which were published in January. The numbers revealed that consumer prices plunged from 7.1% in November to 6.5% in December. As such, the view was that the Fed would start pivoting in the first quarter.

The reset happened this month after the strong US jobs and inflation data. The unemployment rate dropped to 3.4% in January, the lowest level in more than 50 years. In the same period, headline inflation dropped slightly to 6.4% while retail sales surged. 

Many analysts believe that the US dollar index has more room to run. In a note, analysts at ING Bank took the contrarian view and warned that the index may have peaked. The statement said:

“The current instability in the geopolitical picture warrants caution and a bit more support to the dollar may be on the cards, even though we see a good chance that the USD upside correction has peaked.”

ING analysts have recently taken a more measured approach on the USD and the Fed. For example, they believe that inflation will continue falling, which will put more pressure on the Fed to start cutting interest rates in Q4.

US dollar index forecast

DXY index chart by TradingView

The daily chart shows that the DXY index has made a strong comeback in the past few weeks. This rebound has started fading as it has remained stuck at the first resistance of the Woodie pivot point. Notably, it has moved above the 25-day and 50-day moving averages. It has also formed a small inverted head and shoulders pattern.

Therefore, the US dollar will likely rising slightly as buyers target the key resistance point at $105.5. I suspect that it will then resume the bearish trend in the near term. This view is in line with what ING analysts warned last week in this article.