US Dollar Q3 2022 Technical Forecast: Does the Bull Stampede Have More Room to Roam?

The bullish USD trend turned a year-old last month. And it can be difficult to put into scope everything that’s happened since then but, just last May, DXY was grinding at the same 90 level that had held the lows at the start of the year.

Sentiment at the time still felt overwhelmingly bearish in the Greenback. Covid numbers were still being counted and there was fear that the pandemic was about to rear its ugly head again, which only helped to keep the Fed in an ultra-dovish position. Sure, inflation had started to tick up: In May of last year, CPI had just been released for April at the tune of 4.2%. But – this was the first print over 3% and only the second over the Fed’s 2% target. The bank wasn’t worried and continued to shrug off the risk of higher rates of inflation as transitory.

But it’s during last Q3 when this theme really started to come to life. In July 2021, inflation data for June was released to the tune of 5.4% and the same number printed a month later, starting to establish a trend. By the time we got to September, the Fed was becoming more responsive, and it was the September FOMC rate decision in which the bank began to forecast actual rate hikes in response to that inflation, with the first expected to land at some point in 2022. The US Dollar broke out at that point and hasn’t really looked back since. I’m illustrating this period of time on the below chart with a blue box.

US Dollar Index (DXY) – Weekly Timeframe (June 2018 to Present)

Source: TradingView; Prepared by James Stanley

USD Since the Break

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 (1998- Present)

Source: TradingView; Prepared by James Stanley

Q3 2022 Forecast for the US Dollar: Bullish

I’m keeping the technical forecast for the US Dollar as bullish for Q3. There’s simply no sign yet that the trend is over and until there are more developments in Europe towards higher rates, it’s difficult to justify the expectation of significant change in this trend.

From a technical perspective, the response to the pullback in late-May is pretty much what one would want to see for bullish continuation scenarios. The pullback was almost a perfect 23.6% retracement, which was quickly followed by a push up to a fresh high. That fresh high printed at 105.79 and that level presents additional breakout opportunity if it’s traded through.

Dollar Index (DXY) – Daily Timeframe (2021- Present)

Source: TradingView; Prepared by James Stanley