US Dollar Index Price Forecast: Is This the Lull Before the Next Bullish Move?

The US Dollar remains on the back foot as markets await October’s US CPI release.
Fresh military strikes on Iran are highly unlikely, US President Trump indicates.
The decline in oil prices continues to weigh on the US Dollar.

Selling pressure persists across the US Dollar (USD) against its peers as hopes of a United States (US)-Iran agreement drive oil prices lower.

With the previous day’s losses intact, the US Dollar Index (DXY) hovers near 101.67 during Tuesday’s European session. The index measures the Greenback against six major currencies. At the same time, WTI Oil has slipped to a fresh 10-week low of around $84.20.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A softer stance from Washington over the weekend has lifted investor optimism, MUFG analysts said in a note. They pointed to President Donald Trump’s remarks to CNN that it is “highly unlikely” he will have to authorise further military strikes on Iran, provided talks continue to make progress.

Even so, the quality of any agreement remains decisive, MUFG warned, noting that US President Trump also said “it depends on whether or not they sign a very strong agreement,” a qualification the bank considers essential to sustaining the recent decline in geopolitical risk premia.

As oil prices retreat, currencies of energy-exporting economies such as the US become less attractive.

Attention on the domestic calendar is centred on October’s US Consumer Price Index (CPI) figures, due at 13:30 GMT.

Could softer core CPI ease the Fed’s concerns over inflation spillovers?

Energy-price spillovers remain a key concern ahead of this week’s US inflation release. According to MUFG/BTMU analysts, both the Fed and market participants will scrutinise the data “closely for evidence of spillover effects from higher energy prices.” They observe that “recent core CPI readings have surprised to the upside over the last couple of months,” describing the consequence as “putting pressure on the Fed to tighten policy.” The near-term risk could nevertheless be easing, MUFG/BTMU suggest, given that “consensus expectations are looking for a softer core CPI print of 0.2%M/M in October,” leaving some room for inflation momentum to slow while policymakers continue to monitor the pass-through from energy costs.

US Dollar Index Technical Analysis: Is Another Bullish Move Ahead?

A neutral bias prevails on the daily chart, with Dollar Index Spot at 101.65, close to its 20-period exponential moving average (EMA) of 101.79.

At around 49, the Relative Strength Index (RSI) signals neutral momentum, offering little counterweight to the prevailing structural pressure.

A Bullish Flag chart pattern has formed, suggesting that the current neutral phase could precede another upward move, in keeping with the pattern’s historical behaviour.

For an advance, the first resistance lies at the 20-EMA near 101.79. Beyond that is the reclaimed trend-line area around 102.20, where sellers may attempt to preserve the broader corrective structure. If the index breaks above that structure, a return to its yearly high near 103.00 would become more likely.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Key Questions Answered

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No currency is traded more widely: figures from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The British Pound was displaced by the USD as the world’s reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. Price stability, achieved by controlling inflation, and full employment form the Fed’s two mandates. Adjusting interest rates is its main means of pursuing both objectives. To support the USD, the Fed raises rates when prices climb too rapidly and inflation exceeds its 2% target. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve may create additional Dollars through quantitative easing (QE), substantially expanding the supply of credit to a financial system that has stalled. This unconventional policy is deployed when credit dries up as banks stop lending to one another for fear of counterparty default. It serves as a last resort if interest-rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. Under this process, the Fed prints more Dollars to purchase US government bonds, mainly from financial institutions. The usual effect of QE is a weaker US Dollar.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

By contrast, quantitative tightening (QT) involves the Federal Reserve ending bond purchases from financial institutions and allowing its existing bonds to mature without reinvesting the principal in further purchases. This process generally supports the US Dollar.