Dollar traders have been closely monitoring a potential bullish “inverse heads-and-shoulders” pattern in the U.S. dollars index (DXY). The smell of a stronger greenback is reducing Bitcoin’s ( BTC) upside case as the main cryptocurrency struggles to get out of its $30,000-35,000 trading range.
Three troughs and one price ceiling
The inverse head-and shoulder (IH&S), pattern is formed after a downtrend. It has three troughs. The middle trough (head), is deeper than the two lower troughs (shoulders and chest). Ideal is for the shoulders to be equal in height and width. The neckline, which serves as resistance, is a price ceiling that hangs from the troughs.
DXY is a measure of the strength of the dollar against a basket top foreign currencies. It currently checks all boxes to show that it has formed an IH&S-like pattern.
Now, the index is looking at the possibility of a bullish breakout if it closes above its neckline resistance. It would then set up a technical profit target equal to the gap between the neckline and the bottom of its head.
DXY is expected to rise almost 5% in bullish scenarios, based on potential neckline breakout moves.
The index’s 50 day simple moving average (50 SMA; blue wave) is also expected to surpass its 200-day simple move average (20-days SMA; saffron waves) to confirm a Golden Cross. Traders view golden crosses as bullish indicators.
Dollar fundamentals
After March 2020, a weaker dollar environment provided a tailwind to risk assets and global economic growth. This was aided by the U.S. Federal Reserve’s quantitative ease policies that were implemented to mitigate the effects of the coronavirus pandemic. DXY closed 2020 with a 6.83% loss.
The dollar was showing signs of trend reversals in 2021 as the U.S. economy recovered strongly after a swift coronavirus vaccine program. Global investors saw a rise in demand for dollar-based investments and the dollar as markets reopened.
Santiago Capital’s chief executive Brent Johnson called the dollar ” Giffen good”, a type of asset that has a rising demand with increasing prices. He pointed out that global investors had increased their dollar debts , despite the Fed’s increasing inflation.
“Continued debt issuance in USD increases future demand (the debt must repaid in USD), and, as noted above this demand doesn’t abate as the price goes up.”
Chief financial analyst at Delphi Digital, Kevin Kelly, stated that the net speculative futures position on DXY has not become as bearish as it was at the start of 2021. The setup is similar to DXY’s early 2018 positioning, which was followed by an approximately 10% price rise over the next 18 months.
Inflation setup
Recent DXY market gains were accompanied by three consecutive monthly inflation spikes. According to the Labor Department’s latest Tuesday release, the U.S. consumer prices index increased by 5.4% year-overyear, which is the highest 12-month rate of inflation since August 2008.
James Freeman, the assistant editor of the Wall Street Journal, attributed the persistent inflationary pressure to the Fed’s money printing policies. He noted that each dollar has been losing its value due to this. The Fed assured that inflation is a temporary problem and provided a bullish support to the DXY rally.
Jerome Powell , Fed chairman, testified before Congress on Wednesday. He stated that current economic conditions do not permit them to reduce their quantitative easing programs. This includes a $120bn per month bond-buying programme. Powell said that the Fed would notify markets in advance if it ever decided to reduce its buying.
