Home > Dollar index rises to 2021 highs; here’s what the charts signal

Dollar index rises to 2021 highs; here’s what the charts signal

The US dollar is on a tear higher – the Dollar index rose to 2021 highs following much stronger than expected inflation data for October. What does the technical picture signal?

The US inflation data for October was released yesterday, and it surprised to the upside. As measured by the CPI or consumer price index, the prices of goods and services in the United States rose by 0.9% Mom on expectations of a 0.6% increase. Moreover, the Core CPI data, which excludes volatile items such as food and energy prices, rose by 0.6% on 0.4% expectations.

As a result, the US dollar ripped higher. The US core inflation is highest in 30 years, and traders increased bets that the Federal Reserve would not remain indifferent and will be more aggressive in tightening the monetary policy.

One way to measure the dollar’s strength or weakness is to interpret the Dollar index – a weighted geometric mean of the dollar’s value relative to a basket of currencies. The euro has the biggest weight (57.6%) in the basket, and the rest belongs to currencies such as the Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

While it made a new high for the year, the technical picture calls for caution in the period ahead. Indeed, more strength might lie ahead in the short-term, but stiff resistance appears on the horizon.

Stiff resistance lies ahead

2021 started with the dollar index at the lows. The pressure remained in the first months of the trading year, despite a small bounce fueled by the EUR/USD pair dropping from 1.23 to 1.17 early in the trading year.

Since then, the Dollar index formed a double bottom pattern with a measured move pointing to 96. In other words, the technical picture reveals that there is still room to go for the Dollar index’s bulls, but caution is needed. The 96 area turns out to have provided solid support back in 2019 and 2020; thus if we respect the interchangeability principle, support should turn into resistance now.

In other words, Dollar index bulls would likely cover some of their positions by the time market reaches 96. Therefore, we should expect the EUR/USD pair, the dominant pair in the index, to find a bottom in the short term.

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