Larry Summers has a warning

The US dollar index continued its bullish comeback as investors remained optimistic about the next actions by the Federal Reserve. The DXY jumped to a high of $105.31, the highest point since January 6 as Fed officials reiterated their hawkish view of the economy. 

Fed hikes to continue

The US dollar index rally continued after the strong America’s inflation numbers reinforced the view that the Fed will maintain a hawkish tone. 

Data by the Bureau of Labor Statistics (BLS) revealed that the country’s personal consumption expenditure (PCE) index held at an elevated level in January. Core PCE, which strips the volatile food and energy prices, also remained above the Fed’s target of 2.0%.

As a result, analysts believe that the Fed has more room for hikes. In a note, analysts at ING, who still believe that the Fed will cut rates later this year, now expect three 0.25% hikes until June this year. They noted that:

“DXY broke above 105.00 on Friday and the multi-week bias looks towards resistance at the 106.20/106.50 area – some 1.00/1.20% above current levels. Through March we will better assess whether these prove the best dollar levels of the year.”

In an interview with Bloomberg, Larry Summers, who is a widely-respected economist, warned that the Fed will find it difficult to reach its 2% inflation target. 

Analysts at Bank of America have also warned that the US dollar index will continue soaring in the coming months. Precisely, they noted that the dollar strength will likely push the EUR/USD pair below parity in the next few months. If this happens, the dollar index could continue rising.They said:

“We’d be remiss to not mention that when Euro forms a bottom below 1.15 it tends to retest the monthly closing lows at least once. This means the risk of a retest of the 2022 closing lows in 1H23 still can’t be ruled out to form a bigger bottom.”

US dollar index forecast

DXY chart by TradingView

The DXY index has continued forming higher highs and higher lows in the past few weeks. This price action has seen it rise to the important resistance point at $105, the highest point since January. It has soared by more than 4% from its lowest point this year. As it rose, the index has moved above key resistance levels at $104.67 and the 25-day and 50-day moving averages. 

Therefore, the outlook of the US dollar index is bullish, with the next key level to watch being at $105.63. For this week, the key data to watch will be housing, consumer confidence, and flash manufacturing and services PMI numbers.