DXY: US dollar index overbought after strong non-farm payrolls

Written by: Crispus Nyaga
March 5, 2021
  • The US dollar index has reached overbought levels after the NFP data.
  • The US economy created 379,000 jobs in February this year.
  • Senate will debate Biden’s $1.9 trillion stimulus package.

The US dollar index (DXY) soared to the highest level since December last year after a speech by Jerome Powell. It is trading at $91.93, which is almost 3% above the lowest level this year.

Dollar index
US dollar index chart

Jerome Powell speech

In a statement yesterday, Jerome Powell, the Federal Reserve Chair, said that he would be concerned about choppy markets. However, he did not reiterate the precise measures he is willing to take to reduce volatility. Also, he said that it was too early to abandon the current policies. 

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Still, analysts believe that the market is getting ahead of the Federal Reserve. This is evidenced by the recent price action in the bond market, where the ten-year yield has risen to the highest level since February 10 last year. 

US 10-year bond yield
US 10-year bond yield

Further, the closely-watched five-year break-even rate has climbed to the highest level since 2008. This number is derived from the 5-Year Treasury Constant Maturity Securities.

Inflation expectation
5-year breakeven rate

This sentiment has risen substantially especially now that the US Senate is deliberating the new $1.9 trillion stimulus package. There are high chances that all Democrat senators will vote for the bill.

US non-farm payroll data

The dollar index is also reacting to the latest US non-farm payroll numbers that were published today. 

According to the Bureau of Labour Statistics (BLS), the American economy created more than 379,000 jobs in February. This was a higher figure than the 40,000 jobs that were created in January. In the same period, the U3 unemployment rate declined from 6.3% to 6.2% while the U6 remained at 11.1%

The participation rate remained at 61.4% while the average hourly earnings remained at 5.3%.

Economists expect this trend will continue, helped by the imminent reopening of the economy as the number of coronavirus cases fall and vaccinations increase. 

US dollar index technical outlook

Dollar index chart

The 4H chart shows that the US dollar index has been in a strong uptrend. It rose to a high of $91.50 and moved above the important resistance at $91.60. The price is also above the Ichimoku cloud and is along the upper side of the Bollinger Bands. The Relative Strength Index (RSI) has also moved above the overbought level. Therefore, while the index may keep rising, there is a possibility of a short-term pullback.