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US Dollar Index (DXY) Forecast: Will The US Dollar Decline Have Legs?

US Dollar Index (DXY) Forecast: Will The US Dollar Decline Have Legs?

Tyler Yell, CMT, Currency Strategist

US Dollar Index (DXY) Talking Points:

  • The ONE Thing: US Dollar retreats at proper resistance. Whle the resumption of the longer-term (since January 2017) US Dollar downtrend seems premature, we do seem to have an opportunity for a deeper setback. Focus for a retracement comes at 91.41-90.91.
  • US Dollar Index Technical Analysis: The US Dollar has broken below 92.41 (Ichimoku 9-day midpoint) and puts a pause on the view of the immediate uptrend. DXY has traded above the 9-day midpoint since the early stages of the breakout on April 19. Support at 90.91 aligns with the 26-day midpoint.
  • The counter-trend move lower looks to be supported by the lack of follow through on the US 10-Year yield curve, which has brought the conversation back toward yield curve flattening on the USYC2/10.

A few key developments took place this week in markets that supported the US Dollar and its recent 3-week rally that traders should be made aware.

First, the Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007 and the US 2 to 10 continued toward its flattest level after widening sharply from April 19-26. At that time, the aggregate short position on the US Dollar from institutions was at a 6 year high per the CFTC Commitment of Traders Index with one of the most aggressive long EUR trades on ever.

Mid-April Yield Curve Widening Help To Support USD Unwind

Data source: Bloomberg

Soft Data Encourages Softer Bets on Aggressive Fed

In addition to a re-flattening of the yield curve with what was this week described as a Bull Flattener where doubts arise as to the longevity of a vibrant economy may have reintroduced a goldilocks scenario back into the market, which does not tend to support US Dollar Strength. Similarly, it doesn’t seem likely to make the Fed act aggressively.

When looking at the forward markets, bets are cooling on an aggressive Fed over the coming six months, which is a proxy as to whether or not the market anticipates four hikes in 2018. The easing of the six month forward rate came after Thursday’s weak CPI print and shows that the US Dollar will likely struggle without widening yield spreads.

Data source: Bloomberg

Technical Focus on US Dollar Index: Pullback May Test TL As Support

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Unlock our Q2 forecast to learn what will drive trends for the US Dollar through 2018!

The US Dollar Index pushed to fresh 2018 highs this week before a run of rather weak data. However, the US Dollar train looks to roll-on higher from here, for now. Traders should, of course, watch EUR/USD, which bounced higher this week from the 55-WMA, but a break below would favor a move down to 1.17/15.

The support point to watch may be the topside of the trendline that the US Dollar recently broke above that was drawn from the 2017 high and an initial lower high. The price zone aligns with the 38.2-50% retracement of the Mid-April to May 9 rally at 91.41-90.91.

Additionally, the break below the 9-period midpoint at 92.41 also gives reason for short-term pause. The broader picture from the ever-helpful Ichimoku shows a bullish trend in pullback mode that would be reaffirmed on a move back above the 9-day midpoint as long as the lagging line remains above price from 26-periods ago.

Not familiar with Ichimoku? You’re not alone and in luck. I created a free guide for you here

Recommended Reading: 4 Effective Trading Indicators Every Trader Should Know

Insight from IG Client Positioning: Traders are betting the EUR has bottomed, but that may be an expensive play.

EUR/USD sentiment is analyzed for insight since EUR/USD makes up 57.6% of the DXY basket.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall.

New to FX trading? No worries, we created this guide just for you.

More For You:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

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