US dollar index (DXY) forms a bearish divergence as bond yields slip

The US dollar index (DXY) came under intense pressure this week as America’s bond yields retreated. The sell-off continued on Friday after the latest US non-farm payrolls (NFP) pushed more investors to embrace a risk-on sentiment. It slipped to a low of $105.27, lower than the YTD high of $107.

US NFP data and Fed

The DXY index pulled back after the latest Federal Reserve decision. In it, the bank decided to leave interest rates unchanged between 5.25% and 5.50%. The FOMC committee then left the dor wide open for a rate hike in its December meeting.

However, a long press conference by Jerome Powell left many investors predicting that the Fed had ended rate hikes. As a result, bond yields retreated, with the 10-year falling to 4.52% and the 30-year slipping to 4.7%.

American equities are also surging. The Dow Jones soared by over 500 points on Thursday and 165% on Friday. These equities are on track for their best monthly gains since June this year.

The US dollar index sell-off continued after the Bureau of Labor Statistics (BLS) published weak jobs numbers. The economy created 150k jobs in October after adding 297k in the previous month. This addition was lower than the median estimate of 180k. 

The unemployment rate rose to 3.9% while the closely-watched labor participation rate dropped to 62.7%. The average hourly earnings rose by 0.2% and 4.% on a MoM and YoY basis, respectively. 

These numbers, together with the relatively weak services PMI data, means that the Federal Reserve will likely maintain interest rates at the current level for a while. The same is true with other central banks like the Federal Reserve, ECB, and the Bank of England.

The next important data to watch will be the upcoming US consumer inflation report. This report will confirm whether inflation is indeed cooling, which will be a positive thing.

US dollar index forecast

DXY chart by TradingView

The DXY index formed a double-top pattern at $107.20, which is a bearish sign. It has moved below the neckline of this pattern at $10536. On the daily chart, it has moved below the important support at $105.88, the highest swing on March 8th. 

The index has also moved below the 50-day and 25-day moving averages. Most importantly, the MACD has formed a bearish divergence pattern. Therefore, the outlook for the US dollar index is bearish, with the next point to watch being at $104. It will do that as it completes the inverted head and shoulders pattern.