DXY preview: US dollar index may be shaping for a blow-off high before a pullback begins

US dollar index and seasonal trends

Leading up to this week's avalanche of key event risks, the US dollar index, known as the DXY, has risen by 1.42% for the month, aligning closely with its average ten-year September gain of +1.44%.

Following September, the remaining three months of the year typically witness a decline in the DXY, averaging -2.48%. If the 2023 seasonal patterns hold, the DXY should be nearing a peak before a potential pullback toward 103.00/102.75 by year-end.

While seasonal trends serve as a useful guide, they seldom align precisely in terms of timing. Moreover, this week presents a multitude of catalysts that could prompt the US dollar to initiate a pullback, possibly after reaching a "blow-off" type high.

Upcoming catalysts for a dollar pullback

The FOMC meeting scheduled for tomorrow morning is undeniably one such event that may trigger a dollar pullback. Another event to watch is Friday's Bank of Japan (BoJ) meeting, where speculations are mounting regarding policy normalisation. BoJ Governor Ueda indicated earlier this month that exiting the negative interest rate policy was under consideration.

This potential shift could begin with the BoJ signaling a change, such as removing its overshooting commitment related to the 2% inflation target (as the conditions are already met) or reducing the amount of Japanese Government Bonds (JGBs) to be purchased through Riban operations. If either of these measures is mentioned in the statement, it could lead to a surging yen, acting as a trigger for a broader US dollar pullback.

DXY technical analysis

In the first half of 2023, the US dollar index (DXY) tested and held support at 101.00/80 on three separate occasions before declining following softer-than-expected inflation data in mid-July.

As we've highlighted since late July, the swift rebound above 101.00/80 revealed the mid-July 99.57 low as a false break lower. For followers of Elliott Wave theory, this was identified as the Wave V low, following the completion of a five-wave impulsive sequence from the September high of 114.78, as displayed on the chart below.

The subsequent rally from the 99.57 low to last week's high of 105.43 is considered the first wave (Wave A) of a corrective rally. Once the current period of DXY strength has concluded, a pullback (Wave B) towards the 200-day moving average at 103.00/102.75 is likely.

However, before that pullback (Wave B) begins and given the event risk this week, there's a possibility that the DXY may experience a blow-off type high that tests or breaks the March 105.88 high before initiating a corrective pullback.

In summary, we believe that the rally in the US dollar index is approaching its conclusion, with a well-deserved pullback on the horizon.

DXY index daily chart

• _{TradingView: the figures stated are as of September 20, 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.}