The Dollar Index (DXY) has reached the inflection zone
Since the low reached earlier this year, the US dollar has steadily caught a bid. One of the main reasons for the strength of the USD is the expectation that the Fed will start declining later this year. The Fed has signaled its intention to cut emergency measures as the economy begins to recover from the global pandemic. The market has more or less taken this decrease into account. At the last Fed meeting, President Powell indicated that a cut ending around mid-2022 may be appropriate.
What is less clear, however, is how quickly the Fed would raise interest rates and revert to normal monetary policy. Inflation has been well above the Fed’s 2% target. Even using the Fed’s preferred inflation indicator, prices rose 3.6% in July year-on-year. The dot-plot of the interest rate projection shows an even split between Fed officials who see interest take off in 2022 and those who see it later than that. Eight of the Fed’s members saw their first interest rate hike in 2023.
We’ll take a look at the Elliott Wave weekly chart for the Dollar Index (DXY) below to see the expected move.
The Dollar Index (DXY) has hit the inflection zone from the January 6, 2021 low in the blue box area of 93.7-96.3. The current rally from January 6, 2021 low is in 3 swing so far. This could be either a ((A)) – ((B)) – ((C)) in a bearish scenario, or ((1)) – ((2)) – ((3)) in a bullish scenario. If the upward movement extends to 161.8% Fibonacci extension at 96.3, then the likelihood of it becoming a pulse wave ((3)) will increase. As long as it remains in the box, the upward movement can be a zigzag ((A)) – ((B)) – ((C)).
As the index has reached the blue box, it may soon drop in at least 3 waves. Shorter cycle, further upward extension cannot be excluded. However, a 3 wave pullback may soon occur assuming a rally ((A)) – ((B)) – ((C)) from the January 6, 2021 low. This view will become less likely if the Dollar Index is able to rally to an extension of 161.8% to 96.3. If that happens, we could become more bullish in the index.