DXY forecast: US dollar index pattern points to a big drop

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 Oct 19, 2021
  • The US dollar index has erased some of the gains it made this month.
  • It has formed a double-top pattern on the 4H chart.
  • Therefore, the index will likely break out lower soon.

The US dollar index (DXY) declined to the lowest level since October 4 as investors embraced the risk-on sentiment. The index is trading at $93.70, which was about 0.90% below the highest level this month. 

Risk-on sentiment

The US dollar index has retreated this week as investors embrace risk. Already, the US has already published the most important economic numbers this month. 

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Two weeks ago, the US published the latest non-farm payrolls (NFP) data. The numbers revealed that the unemployment rate declined to the lowest level since the pandemic started. The participation rate and wages also rose even as the economy added fewer jobs than expected.

Last week, the DXY index reacted to the country’s inflation numbers. The headline consumer price index rose marginally from 5.3% in August to 5.4% in September. This increase was better than the median estimate of 5.3%. Core CPI, which excludes the volatile food and energy products, held steady at 4.0%. 

Additional data published on Friday revealed that consumers were unfazed by the rising inflation. Retail sales rose at a faster pace than expected in September. Consumer sentiment declined to the lowest level in a decade.

The US dollar index is falling even as global risks rise. For example, data published on Monday revealed that China’s economic growth was slowing. At the same time, there is an ongoing energy crisis globally as the price of coal and natural gas roar back. 

There are also logistics challenges going on as shipping ports and airports get overwhelmed. Last week, Dubai Airport said that it will pause its cargo handling business as it deals with the backlog.

The DXY index will next react to the latest housing starts and building permits numbers that will come out on Tuesday. The data is expected to show that the housing sector did relatively well in October.

Dollar index forecast

Dollar index

The four-hour chart shows that the dollar index has been in a bearish trend in the past few days. This trend happened after the index formed a double-top pattern at $94.52. In price action analysis, a double-top pattern is usually a bearish sign.

Since then, the pair has crossed the chin of this double-top pattern and the 23.6% Fibonacci retracement level. Therefore, the path of the least resistance is downwards, with the next key support being at the 50% retracement level at $93.22.

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