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DXY: US Dollar Index Rally is Unlikely to Last – UniCredit

EURUSD Euros and Dollar bills

The US dollar index (DXY) is up for the fifth straight day as investors continue to rush to safety. The index is trading at $94.50, which is the highest it has been since July 24th. The recent rally shows that bulls are aiming for the next psychological level of $95. However, in a note, analysts at UniCredit warned that the current gains will unlikely last long.

The US dollar index has been rallying as investors rush to safety as more global risks have risen. For one, the number of COVID cases in Europe has started to rise. Subsequently, this has weakened the region’s currencies. Indeed, the British pound has dropped by more than 2% in the past five days. The euro and the Swedish krona have all risen by more than 2% and 3.75%, respectively.

The dollar has also risen because of the potential risks in the United States. In recent months, we have seen violence erupt in many cities. With the election period nearing, there is a likelihood that this trend will continue. Worse, the likelihood of a contested election has increased. Indeed, Trump has refused to commit to accept the results if he loses. These issues are positive for the dollar because of its role as the reserve currency of the world.

However, in a note, analysts at Unicredit believe that the dollar index rally will be shortlived. They said:

“We do not see big changes, either, in underlying fundamentals or in the Federal Reserve’s rhetoric to justify a much stronger USD at the moment. Its fortune depends essentially on further COVID-19 developments and its strength is unlikely to last long.”

US dollar index technical outlook

The daily chart shows that the dollar index has been in a relatively strong rally. It is now along the 23.6% Fibonacci retracement level (This retracement joins the lowest and highest levels this year). It has also moved above the 25-day and 50-day exponential moving averages. Most importantly, it has moved above the neckline of the previous inverse head and shoulder pattern. Therefore, I suspect that the price will continue rising, at least in the short-term, as bulls eye for the resistance at $95.

On the flip side, a move below $94.00 will mean that there are still some bears in the market who will be keen to test the next support at $92.70.

Dollar index chart

US dollar index