DXY: US dollar index forms bearish flag ahead of NFP data

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 Aug 4, 2021
  • The US dollar index has formed a bearish flag pattern on the 4H chart.
  • Data by ADP showed that private employers added more than 330k jobs.
  • The BLS will publish initial jobless claims data on Thursday and NFP on Friday.

The US dollar index (DXY) was in a tight range after the latest ADP private payrolls data. The index was trading at $92, where it has been in the past few days.

US payrolls data

The biggest catalyst for the US dollar index this week will be the July non-farm payrolls (NFP). Economists polled by Reuters expect that the economy added more than 700,000 jobs in July after adding 850k jobs in the previous month. 

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They also see the unemployment rate falling from 5.9% in June to 5.7% in July while the participation rate rose. Wages likely rose as companies continued dealing with the ongoing labour shortages. 

A report published on Thursday showed that the labour market remained strong in July. According to ADP, private payrolls increased by more than 330,000 after they rose by more than 692k in June. Most of these jobs were led by medium-sized companies. Still, the ADP figure tends to differ substantially from the one released by the government.

On Thursday, the Labour Department will publish the latest initial jobless claims numbers. Analysts expect that initial claims rose by 384,000 last week after rising by more than 400k in the previous week. The continuing jobless claims are expected to increase to more than 3.26 million.

The biggest risk for the US labour market is the rising number of Covid cases. The country is reporting more than 150,000 new cases every day and the trend is increasing. As a result, more states are announcing measures to reduce transmission. For example, New York recently announced a new vaccine and mask mandate. Other states will likely announce similar mandates.

The dollar index will also react to the Bank of England interest rate decision scheduled for Thursday. This decision is notable since it will move the British pound, which is a major constituent of the dollar index.

US dollar index technical analysis

Dollar index

The 4H chart shows that the DXY index broke out below the ascending channel shown in purple last week. The index has also moved below the 25-day and 50-day moving averages. It has also formed a bearish flag pattern and is between the 23.6% and 38.2% Fibonacci retracement level. Therefore, the pair will likely break out lower as bears target the next key support at $91.80. On the flip side, a move above $92.50 will invalidate this view.

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