DXY: US dollar index inverse H&S pattern hints to further upside

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Feb 2, 2021
  • The US dollar index rose to the highest level in seven weeks today.
  • This happened as other peer currencies like euro and Swiss franc declined.
  • The inverse head and shoulders pattern points to further gains

The US dollar index (DXY) rose to the highest level in seven weeks as its key constituent currencies dropped to multiweek lows. The index is trading at $91.15, which is 2.18% above the year-to-date low of $89.22.

Dollar index
US dollar index chart

Major currencies drop

The US dollar index is a relatively popular benchmark used to measure the performance of the dollar. It does this by comparing the greenback’s performance with that of other key currencies. 

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This week, the peer currencies have continued to drop. The euro has dropped by more than 2% from its highest point in January and is now trading at the lowest level since December 1. The currency declined today after the relatively weak EU GDP data.

Meanwhile, the Swiss franc has dropped by more than 2.5% and is trading at the lowest level since December 2. In the same period, the Japanese yen has dropped by 2.4% while the Swedish krona has fallen by 3%. The only main outlier is the British pound, which is relatively unchanged against the dollar.

Dollar vs peers
US dollar vs peer currencies

US data, stimulus, and risks 

The dollar index is also reacting to the relatively strong economic data from the United States. Yesterday, the numbers showed that the manufacturing sector continued to expand in January. Also, construction spending rose during this period.

Looking ahead, forex traders will react to the US services PMI numbers that will be published by the ISM and Markit tomorrow. Also, ADP will release the private payroll numbers two days ahead of the official nonfarm payroll numbers. Economists expect that the US economy added about 50,000 jobs in January after losing 140,000 in the previous month.

Meanwhile, the rising risks in the market associated with Wall Street Bets and the uncertainties of US stimulus have pushed the dollar higher.

US dollar index technical outlook

Dollar index
US dollar index technical chart

The four-hour chart shows that the dollar index formed an inverse head and shoulder pattern whose neckline is at $90.90. The index managed to move above this neckline yesterday. It is also slightly above the 15-day and 25-day exponential moving average (EMA) while the Relative Vigour Index (RVI) has continued rising.

Therefore, the likely scenario is where the DXY rises to $92.77. The distance between the head and the neckline and between the neckline and this level is the same.

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