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US Dollar Q2 Technical Forecast: USD Bullish Channel, 20-Year Highs in Sight

US Dollar Q2 Technical Forecast: USD Bullish Channel, 20-Year Highs in Sight

James Stanley, Senior Strategist
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Q2 2022 Forecast for the US Dollar: Bullish

During the second quarter of 2022, the US Dollar started to turnhigher. In Q1 of 2021 we began to see the reflation trade getting pricedinto markets, boosting US Treasury yields and the US Dollar along the way. The Greenback set a swing high on the final day of Q1 2021 trade before reversing through the first halfof Q2, eventually finding support around the same 90 psychological level that had held the lows earlier in the year. But after bulls got back in the driver’s seat in June, a bullish trend began to develop that remains in effect today.

Along the way, there’s been considerable jostling on the fundamental side. What once seemed unthinkable is now commonplace, with inflation rates raging above 7% and holding at 40-year highs. The Fed, at this point, appears to have no choice.

They’re going to have to hike, and markets have aggressive expectations already built in. But one look at equities that’ve held up through this sudden and dramatic re-pricing in rates and it becomes clear that market participants are already starting to focus on the possible cuts that the Fed will implement after this hiking cycle; in essence, expecting the Fed to be able to pull off a hat trick of hiking rates, crushing inflation and then dropping rates again to boost stocks.

And perhaps that happens, I don’t know, but this isn’t a fundamental forecast, it’s a technical one, and the job here is to evaluate the chart in order to set expectations for what we might be able to anticipate in the coming quarter. I remain very bullish on the USD.

Price action in the USD has just spent the bulk of March trade oscillating around resistance, near the top side of that bullish channel that started to set in Q2 a year ago.

US Dollar Index (DXY) – Weekly Timeframe (2017 to Present)

Source: TradingView; Prepared by James Stanley

USD Longer-Term: A Critical Area Approaches

Taking a step back to the monthly chart of the USD and it becomes clear that the currency spent much of the past seven years in a range-bound environment.

To be sure, there’s a fundamental drive there, often with the inter-play between the Euro and the US Dollar. But, given the trajectory of the shorter-term trend that’s now projecting a tangle with resistance in the not-too-distant future, this zone is worthy of a look.

There’s been a tendency for resistance to show above the 100 level over the past seven years and, bigger picture, this has been problematic pretty much ever since the Euro came into circulation. But now that we have such divergence between the US and European economy, the door may be open for a topside break.

For upcoming resistance, the 100 psychological level looms large and there’s a Fibonacci level at 101.80. Beyond that we have the 20-year high plotted around 103.54. A breach of that brings fresh multi-decade highs to the USD and I think this is a possibility for 2022 trade, although I’d anticipate it to be more of a second-half type of theme. At least I hope that it is, because if this develops faster it will send a very negative signal about global growth.

Dollar Index (DXY) – Monthly Timeframe (2001- Present)

Source: TradingView; Prepared by James Stanley

The Q2 forecast will remain at bullish for the US Dollar, looking for the currency to continue the topside trend that sparked a year ago while adhering to the channel that’s guided the move higher. And, as I said in the Q1 forecast, the motivation for that bullish lean isn’t entirely technical either, as the fundamental environment remains too attractive to ignore at this point. And at this point, it would appear that we have a mesh of fundamental potential and technical criteria that keeps the door open for fresh 20-year highs at some point later this year.

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