US dollar index (DXY) subdued amid mixed signals on Fed hikes

The US dollar index (DXY) has been under pressure as the banking crisis has ebbed in the past few days. It also pulled back to a low of $101.90, the lowest level since February 3rd. In all, the index has plunged by over 10% from its highest level in 2022.

Mixed signals about the Fed

A likely reason why the US dollar index has pulled back is that investors have a mixed picture about the Federal Reserve. Some analysts believe that the bank will continue hiking interest rates while others see it slashing them later this year.

In an interview with CNBC, Larry McDonald of The Bear Traps Report, warned that the Fed could be pushed to cut rates by 100 basis points. He warned that the banking crisis continues and that it could spread to the insurance sector. 

Larry is not alone. Doubleline’s Jeff Gundlach, who is widely seen as the bond king, also warned that the Fed was wrong to continue tightening. He cited the ongoing inverted yield curve, which is one of the most popular indicators.

On the other hand, analysts at Blackrock, the biggest money manager in the world, said that the bank will continue hiking rates this year. They cited the need to continue fighting inflation, which remains stubbornly high. Their statement said:

We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as the recession hit. We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts.”

The most recent data showed that the US inflation has remained stubbornly high in the past few months. In February, the headline consumer price index (CPI) dropped to 6.0% while core CPI rose in February.

US dollar index forecast

DXY chart by TradingView

The daily chart shows that the DXY index has been in a bearish trend in the past few months. It has dropped below the key resistance level at $106, the highest level on March 8. The index has moved below the 25-day and 50-day exponential moving averages (EMA). Further, the Relative Strength Index (RSI) has moved below the neutral point at 50.

Therefore, the US dollar index will likely continue falling as sellers target the next key support level at $100.71, the lowest level on February 2. This bearish view will be invalidated if the price moves above the key resistance at $105.