US dollar index (DXY) pattern points to a comeback soon

By:
on Jan 27, 2023
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  • The US dollar index (DXY) has formed a falling wedge pattern.
  • The EUR/USD pair, on the other hand, has formed a rising wedge.
  • Therefore, the index could soon make a bullish comeback soon.

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The US dollar index (DXY) has been under intense pressure as global investors embrace a risk-on sentiment. It was trading at 101.85, which is a few points above the year-to-date low of 101.55. The index has plunged by over 12% from its 2022 high while the VIX is recoiling at $20.

Fed decision and PCE data

The DXY index has been in a strong sell-off in the past few months. This decline gained steam following December’s monetary policy meeting in which officials decided to hike interest rates by 0.50%. As we wrote here, the bank had delivered four consecutive rate hikes of 0.75%.

The index’s sell-off then gained momentum after the US published weak inflation numbers in January. According to the BLS, the headline consumer price index (CPI) rose by 6.5% in December after rising by 7.3% in the previous month. It was the sixth straight month of decline.

The main forex news on Friday will be the release of the latest US PCE data. Economists expect that the headline PCE data declined from 5.5% in November to 4.6% in December. Core PCE is also expected to have inched downwards during the month. 

These numbers, coupled with other leading indicators, show that the Fed will likely hike rates again next week by 0.50%. It will then point to slower rate hikes in the coming months. It wants to project force in a bid to push bond yields higher and stocks lower.

The US dollar index is also reacting to the GDP data that were published on Thursday. According to the statistics agency, the economy slowed to 2.9% in Q4, which was a slower rate than the previous growth of 3.2%.

US dollar index forecast

EUR/USD
US dollar index (left) and EUR/USD chart

The consensus view in Wall Street is that the DXY index will continue falling in the coming weeks. However, a closer look at the 4H chart sends a different picture. The chart shows hat the index is forming a falling wedge pattern that I have shown in black. This pattern usually leads to a bullish breakout when the two lines move to their confluence. 

Therefore, there is a likelihood that it will rebound after the Fed decision next week and move to the important resistance at 103.57. Further evidence of this is the EUR/USD forex pair shown on the right side which shows that it has formed a rising wedge pattern. This is notable since the euro is the biggest constituent of the US dollar index.

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