DXY: US dollar index forms triangle pattern ahead of CPI data

The US dollar index (DXY) has been in a tight range this week as investors refocus on the latest consumer inflation data. The index is trading at $96.17, which was slightly higher than Thursday’s low of $95.85.

US inflation data

The Federal Reserve has two main roles in the US economy. First, it has the mandate of ensuring that the unemployment rate is relatively low. Second, since it is the one that prints money, it has a role of ensuring that inflation is maintained.

Recent data have shown that the bank has achieved its employment role. Last week, data by the Bureau of Labour Statistics (BLS) showed that the US economy added more than 234k jobs in November. 

While this figure was lower than estimates, the unemployment rate declined to 4.2%. This means that the US has moved to full employment, which happens when the rate moves below 5%.

And on Thursday, data showed that the number of Americans filing for jobless claims tumbled to the lowest level in more than 52 years. 

Meanwhile, the Federal Reserve is having a challenge with inflation. Recent numbers have showed that the US is going through a period of runaway inflation. In October, data showed that the US inflation rose to more than 6%. 

On Friday, the Bureau of Labor Statistics will publish the latest US inflation data. Economists expect the data to show that the headline inflation rose to 6.7% in November. If they are correct, this will be the highest figure in decades.

The US dollar index will be watched closely because the data will come a few days ahead of the next FOMC meeting. As such, if the numbers are strong, it means that the Fed will move to wind down quantitative easing at a faster pace.

US dollar index forecast

The four-hour chart shows that the DXY index has been in a tight range in the past few days. A closer look shows that it has formed a symmetrical triangle pattern. The price is also along the 25-day and 50-day moving averages.

It is also about 0.80% below the year-to-date high while the Relative Strength Index (RSI) is at the neutral level of 50. Therefore, since the triangle is not close to the confluence zone, I suspect that its movements will be limited after the US inflation data.