DXY index: US dollar forms inverse H&S as PMI retreats

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on Mar 1, 2024
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  • The US dollar index has formed an inverse head and shoulders pattern.
  • The index has risen as investors pare back their Fed rate cuts.
  • The US published weak ISM manufacturing and non-manufacturing PMI data.

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The US dollar index (DXY) rose for four straight days as investors assessed the next actions by the Federal Reserve and other global central banks. It was trading at $104.10 on Friday, much higher than the YTD low of $100.60.

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Risk-on sentiment

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The US dollar index has risen even as investors have embraced a risk-on sentiment in the market. American stock indices like the S&P 500 and Nasdaq 100 have all jumped to their record highs while the fear and greed index has moved to the extreme greed zone. 

Similarly, Bitcoin and other cryptocurrencies have continued with their bullish trend in the past few months. Bitcoin is now eying its all-time high of $69,000. Other altcoins like SingularityNET and Bittensor have moved to their all-time highs.

In most cases, the greenback tends to drop when there is a risk-on sentiment in the market. The main reason for the rally is that there is a feeling that the Federal Reserve will not deliver as many interest rate hikes as was expected.

Most economists now expect that the Fed will cut interest rates three times this year. When the year started, the expectation was that there would be about six rate cuts in 2024.

The most important US dollar news came out on Thursday when the US published the latest PCE inflation report. These numbers showed that the headline PCE cooled to 2.4% in January from the previous 2.6%. Still, the PCE number rose from 0.1% to 0.3% on a MoM basis. 

The core PCE figure, on the other hand, rose to 2.8% on a YoY basis and by 0.4% on a MoM basis. These numbers mean that inflation is still a thorn in the flesh for the Fed. Elsewhere in Europe, central banks like the ECB and BoE are expected to start cutting rates sooner than the Fed.

There are concerns that the economy is cooling as well. Consumer confidence, house prices, and durable goods have all tumbled in the past few months. The US published weak the ISM manufacturing and non-manufacturing PMI numbers, which came in at 47.8 and 52.5, respectively.

US dollar index forecast

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DXY index

DXY chart by TradingView

Turning to the daily chart, the first thing that you note is that the DXY index has formed an inverse head and shoulders pattern. In most cases, this pattern is one of the most bullish signs in the market. It has also moved above the 50-day and 100-day Exponential Moving Averages (EMA) and is at the 38.2% retracement point.

Therefore, the outlook for the DXY index is bullish, with the next point to watch being at $104.96, its highest point in February.

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