US Dollar Index (DXY): How Sustainable is the Recent Rally? Morningstar Pattern Hints at Further Upside

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The US Dollar has been enjoying a renaissance of sorts this week with gains largely down to US data not being bad at all.

Looking at the data this week, the sales rate for US new homes spiked back to levels last seen in early 2022.

The report on US economic growth (GDP) for the second quarter (Q2) was revised up significantly, showing the economy grew at a rate of 3.8% instead of the earlier estimate of 3.3%. A big reason for this improvement is that consumer spending (personal consumption) was much stronger, rising by 2.5% instead of 1.6%

Perhaps even more important, the number of people newly filing for unemployment benefits (initial jobless claims) dropped for the second week in a row, falling from 232,000 to 218,000. This level is very low and much better than the average for the past year. This is a complete turnaround from two weeks ago, when claims had suddenly jumped to a high of 264,000, a number that now seems like a one-off mistake or "fluke."

Finally, businesses unexpectedly bought more long-lasting goods (durable goods orders), rising by 2.9% in August.

Add to that mixed messages from Federal Reserve policymakers and it has been an interesting week to say the least.

A sign of the US Dollars sensitivity stems from changes by and large to US rate cut bets after each data release at the moment. This was evident by the uptick in US treasury yields this week.

Market participants are seeing a less dovish picture as the data is released and reacting, even if the moves prove short-term in nature. There is a clear spike in volatility.

US Dollar to Remain Sensitive to US Data

Next week is another massive one with a host of high impact data releases.

House prices have now dropped for four months straight because the number of homes for sale is rising while fewer buyers can afford them, and there is a growing probability that a fifth consecutive monthly drop will materialize next week, which will further hurt consumer confidence.

Beyond housing, households are worried about tariffs driving up prices and reducing their spending, and they are becoming increasingly concerned about the job market; job creation has slowed dramatically, and recent re-evaluations suggest the slowdown started from a much weaker baseline than previously thought.

While my prediction is a small but temporary bounce in job creation to 71,000 next week, this forecast is uncertain as the broader market expects another weak result.

Even though inflation is still too high, the Federal Reserve (Fed) is committed to balancing both price stability and maximum employment, leading me to expect the central bank to cut interest rates by a quarter of a percent at both their October and December meetings unless we get a major surprise in the coming weeks.

According to LSEG data, markets are pricing in around an 87% probability of a rate cut in October and 62% of a rate cut in December.

The implied rates have however shifted from around 47 bps through December 2025 to the current pricing of around 39 bps.

Source: LSEG (click to enlarge)

Whether the Dollar is able to hold onto recent gains and build on them will largely depend on the data next week. Deteriorating confidence and a poor job number could weaken the US Dollar and send it down to recent lows.

Conversely, a strong jobs number and improving sentiment could aid the USD and help it build on recent gains.

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Technical Analysis - US Dollar Index (DXY)

From a technical perspective, the US Dollar index on the weekly timeframe has printed a morningstar candlestick pattern which hints at further upside.

Dropping down to the daily timeframe and we have had a convincing break of the long term descdening trendline that has been in play.

Now obviously that does mean that we could get a pullback and retest of the trendline before moving higher. Today we have seen a pullback off resistance provided by the 100-day MA.

The RSI period-14 has moved beyond the 50 level as well which is a sign of bullish momentum.

There is a possibility that the USD could struggle in the early part of the week and retest the trendline ahead of the jobs data print on Friday before making its next decisive move.

All in all a key week ahead for the greenback.

US Dollar Index Daily Chart, September 26, 2025

Source: TradingView.com (click to enlarge)

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda

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