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US Dollar Forecast: DXY Bull Flag Emerges Ahead of Fed Rate Decision

US Dollar Forecast: DXY Bull Flag Emerges Ahead of Fed Rate Decision

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US Dollar Talking Points

The US Dollar Index (DXY) is little changed from the start of the month after trading to a fresh yearly high (96.94) in November, but the Greenback may reestablish an upward trend following the Federal Reserve’s last interest rate decision for 2021 as it appears to be trading within a bull flag formation.

Technical Forecast for US Dollar: Bullish

The broader outlook for the US Dollar Index remains constructive as the Greenback trades to fresh yearly highs throughout the second half of 2021, and the Federal Open Market Committee (FOMC) rate decision on December 15 may do little to derail the greenback as the central bank carries out its exit strategy.

It remains to be seen if the FOMC will adjust the forward guidance for monetary policy as the central bank is slated to update the Summary of Economic Projections (SEP), but speculation for higher US interest rates may keep the DXY above the monthly low (95.67) as Chairman Jerome Powell and Co. appear to be on track to deliver a rate hike in 2022.

In turn, DXY may continue to exhibit an upward trend over the coming months as both the 50-Day SMA (94.91) and 200-Day SMA (92.68) reflect a positive slope, but the advance from the October low (93.28) seems to have stalled ahead of the July 2020 high (97.62), with the Greenback largely unchanged since the start of December.

The recent pullback in DXY was accompanied by a textbook sell signal in the Relative Strength Index (RSI) as the oscillator fell below 70 in November, but a bull flag formation appears to be taking shape as the US Dollar Index holds above the monthly low (95.67).

Lack of momentum to close below the 95.90 (23.6% expansion) to 96.10 (50% retracement) region may lead to a breakout as it trades within a continuation pattern, with a break above the November high (96.94) opening up the 97.10 (38.2% expansion) area.

Next area of interest comes in around 97.60 (23.6% expansion) to 98.20 (50% expansion), which lines up with the July 2020 high (97.62), with a break above the June 2020 (98.32) bringing the 99.20 (61.8% expansion) on the radar.

However, failure to hold above the 95.90 (23.6% expansion) to 96.10 (50% retracement) region may push DXY back towards the 50-Day SMA (94.91), which lines up with the former resistance zone around 94.10 (38.2% retracement) to 94.80 (38.2% retracement).

USD Forecast
USD Forecast
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.