DXY: Reversal or correction? Insights from the DXY index

Dollar decline drama

It's been a testing few weeks for US dollar bulls. The US dollar index, the DXY, is now down over 3% month to date, the sell-off gaining momentum after the cooler-than-expected inflation print.

US dollar weakness in November is generally to be expected. Last year, the USD index, the DXY, fell 5% in November. The USD sell-off coincided with an 8% rally in the S&P 500 during November as the market unwound defensive positioning across multiple asset classes, put on in anticipation of a hard landing.

This November, the sell-off in the US dollar and the rally in equities has come following a run of softer economic data across PMIs, Non-Farm Payrolls, and inflation that raises hopes the Fed has ended its rate-hiking cycle and is on track to deliver an elusive soft landing.

Is it a reversal or just a correction?

While we have likely seen peak growth and interest rates in the US, US growth after the current rebalancing is still expected to outperform, particularly in contrast to the EU and the UK. A situation that will support US earnings, US yields, and the dollar.

On the other side of the coin, if a deeper downturn were to eventuate and/or Donald Trump wins the US Presidential election next year, the anticyclical US dollar would likely be supported. Hence, the USD wins again.

USD vs. JPY: a wild card

The biggest wild card could be the USD against the JPY. While we are inclined to think a multiyear double high is in place for USD/JPY at 151.95ish and that the JPY is beyond cheap, the USD still holds a significant yield advantage over the JPY. Some aggressive normalization of BoJ policy is required for that to change.

DXY technical analysis

The rally in the US dollar index, the DXY, from the July 99.57 low took the DXY to 107.34, the 50% fibo retracement of the decline from the October 2022 114.78 high to the July 2023 99.57 low. The retreat from the 107.34 high saw the DXY this week test the 200-day moving average, currently at 103.61, the level at which the DXY closed overnight.

Given the DXY’s attempt overnight to reclaim support coming from the 200-day moving average and the oversold nature of the decline, we suspect a bounce is looming that sets up some range trading into yearend. A range that might look like something like 103.00 to 105.50ish.

If the DXY were to lose the support of the DXY for a sustained period, it would warn that a deeper decline is underway.

DXY daily chart

• _{TradingView: the figures stated are as of 22 November 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}