US dollar index forms a double-tops ahead of CPI data

The US dollar index (DXY) has formed a small double-top pattern as focus shifts to the upcoming American inflation data. It pulled back to a low of $103.18, which was lower than last week’s high of near $104. This price action could be a signal that the recent strong rebound has started fading.

US inflation data ahead

The US will publish the most important economic numbers of the month on Tuesday. Sure, the strong non-farm payrolls (NFP) numbers were important, but the upcoming US inflation numbers are more crucial.

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The jobs numbers showed that the American economy added over 500k jobs in January while the unemployment rate dropped at 3.4%. We wrote about these numbers here. The jobless rate was expected to remain that low anyway.

The American economy is sending mixed signals on inflation. For one, the strong jobs numbers mean that inflation could remain higher for longer. In economics, this is known as the Philip’s curve. In his statement last week, Jerome Powell reinforced that, saying that the labor market could work against disinflation.

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Goods prices have clearly declined, helped by the ongoing reopening and falling shipping costs. However, services inflation remains at an elevated level. Therefore, economists expect that the US inflation rose to 0.4% on a month-on-month basis. They also expect that the headline CPI declined to 6.2% on a year-on-year basis. This will be the seventh month of declines.

These inflation numbers will be important because of the dual role of the Federal Reserve. The Fed has already achieved its role on the labor market but inflation remains high. As such, signs that inflation is easing mean that the Fed will have more room to ease the pace of hikes. In a note, Wael Makarem of Exness wrote that: 

“A surprise tomorrow could alter expectations. Higher-than-expected inflation figures could reinforce the case for higher interest rates for a longer period of time, which could push the US dollar higher. In any case, higher volatility could be expected.”

US dollar index forecast

US dollar indexUS dollar index

DXY chart by TradingView

Moving to the 4H chart, we see that the DXY index has formed a small double-top pattern at ~$104. In technical analysis and price action, this pattern is usually a bearish sign. Its neckline is at $102. Notably, the double-top pattern is at the higher side of the descending regression channel.

Therefore, the outlook of the US dollar index is bearish ahead of the American inflation data. If this happens, it will likely retest the key support at $102. A move above the resistance point at $103.96 will invalidate the bearish view.