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USD Q4 2022 Technical Forecast: Still Bullish on the US Dollar

USD Q4 2022 Technical Forecast: Still Bullish on the US Dollar

James Stanley, Senior Strategist
  • As global economic risks rise, the US Dollar is positioned to benefit as the global safe-haven.
  • The US Dollar also has a rate advantage as the US central bank has and will likely continue to be the leader amongst global central banks during this tightening cycle.
  • There's no evidence yet that the USD bullish trend is yet at its end.
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At this point the bullish trend in the US Dollar is sixteen months old. DXY was finding support around the 90 handle in May of 2021 and as we head into Q4, at the time of this writing, the greenback is trading above the 113 level for the first time since 2002.

I’m keeping the technical forecast on the US Dollar to bullish as there’s no end in sight yet for this trend. I do hope that it finds resistance in Q4, at some point, as this level of instability is unlikely to bear much long-term positivity for western capitalism. And with a continued surge in the US Dollar comes a host of other risks, such as more inflation for Europe or the UK at a time when they can ill-afford such a scenario.

There’s the rate dynamic that keeps matters bullish for the USD; but now there’s also the risk aversion aspect. And investors have the opportunity to not only track one of the highest yielding currencies in the world – but also one of the ‘safest’ currencies as we are in the peculiar situation where the flight-to-quality also correlates with the highest yielder.

So, while I hope that we see an element of capitulation in Q4, for the sake of the global economy, I simply do not see evidence of such and thusly am keeping the technical forecast to bullish.

From the monthly chart below, we can see a trend that’s been increasing in strength. Perhaps the most disconcerting part of this chart is that the downtrend from 2002 to 2008 saw 41% shed from the Dollar’s value – but this was due to the Euro coming online. It was the first time that the USD had competition from a supranational currency, and this was the European project gaining global acceptance.

All of that has now been flipped and the 120 spot that provided resistance in 2002 doesn’t seem like a far-out possibility.

US Dollar Index (DXY) – Monthly Timeframe (1987 to Present)

image1.png

Source: TradingView; Prepared by James Stanley

USD: Trading Parabolas

As I’m writing this the US Dollar has just jumped up to another fresh 20-year-high. As a rule, I generally avoid chasing markets especially one that’s already stretched. But when writing a quarterly forecast, it’s important to remember that there are three full months remaining behind that forecast and a bit of projection is going to be required.

But, overbought doesn’t mean that prices can’t go up any longer and if anything, that reason for creation of the overbought situation can continue to drive. The weekly chart of the US Dollar looks parabolic at this point. And the bullish trend is not new as it has simply continued to heat up since I looked at that support at the 90.00 handle on DXY in the Q3 technical forecast in 2021.

There’s support potential around the 110 level should a pullback show. The resistance side is a bit trickier to work with given the dearth of recent history, but levels such as 115.00 or 117.50 remain relevant, as buyers pushing the greenback to fresh highs might find a bit of turbulence or pause at those psychological levels, similar to what showed around the 110.00 level during Q3, albeit briefly.

Dollar Index (DXY) – Weekly Timeframe (June 2016- Present)

image2.png

Source: TradingView; Prepared by James Stanley

Q4 2022 Forecast for the US Dollar: Bullish

I’m keeping the technical forecast for the US Dollar as bullish for Q4. There’s still no sign that the trend is over, and now we have the scenario where the safe haven and flight to quality currency is also one of the highest yielding, so there’s no clear end in sight just yet and this is illustrated well in the above charts.

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