DXY: US dollar index forms head and shoulder as US yields rise

Written by: Crispus Nyaga
February 22, 2021
  • The US dollar index has formed a head and shoulders pattern on the 4H chart.
  • Investors are focusing on the rising US treasury yields.
  • Jerome Powell will testify in the Senate on Tuesday.

The US dollar index (DXY) is in its third straight day in the red as forex traders react to the rising US yields. They are also watching a key testimony by Jerome Powell and the ongoing stimulus negotiations. 

Stimulus and yields

The US Congress will continue deliberations of Joe Biden’s $1.9 trillion stimulus package. It allocates about $1,400 stimulus checks that will go to households. Further, the bill proposes a gradual increase of the country’s minimum wage to $15 per hour and funds for states and local governments. Most importantly, the bill will push the US public debt to more than $30 trillion.

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Investors expect that the stimulus will lead to higher inflation. This is evidenced by the rising treasury yields. Earlier today, the gap between the 5-year and 30-year treasury yields increased to the highest point in five years. Bond yields of other countries like the UK and Australia have also surged.

yields
US 30-year and 5-year yields

Therefore, the dollar index will likely react to Jerome Powell’s testimony to the Senate. He will talk about the recent actions by the bank and what he plans to do if the inflation returns. In a statement a few months ago, he committed to letting the rate of inflation move above 2%.

Recent economic numbers from the United States have been mixed. On Friday, data by Markit revealed that the flash manufacturing and services PMI data increased in February. However, a day before, the country released weak initial and continuing jobless claims numbers. 

The US dollar has dropped against most currencies in the dollar index. It has fallen by 0.15% against the euro and 0.10% against the British pound. However, the ongoing carry trade situation has pushed the currency above emerging market currencies like the South African rand and Mexican peso.

US dollar index technical outlook

US dollar index
Dollar index technical chart

The four-hour chart shows that the dollar index has been retreating after it reached a high of $91.10 on February 17. The index has also moved below the short and long-term moving averages. Notably, it has formed a head and shoulders pattern that is shown in blue. The neckline of this pattern is around $90.20. Therefore, the index may soon break-out below the support at $90 and retest the YTD low of $89.22.