DXY: US dollar index forecast as the yield curve inverts

The US dollar index retreated slightly on Thursday morning even after the bond market started issuing warning signs about the economy. The DXY is trading at $99, which is a few points below its highest level this year,

Yield curve inversion

One of the biggest stories this week was that the yield curve inverted on Monday. This happened as the yield of the 10-year government bond moved above that of longer bonds like 30-year. In a normal situation, the opposite should be the case since investors usually demand a better return for their longer-dated holdings.

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The performance of the yield curve is one of the most accurate predictors of recessions in the US. It predicted the dot com bubble, the 2008 financial crisis, and even the Covid recession in 2020. 

The main reason for the yield curve inversion is that the Federal Reserve has come out swinging after being wrong about inflation. Statements by Fed officials warned that the bank will be significantly hawkish in 2022 in its bid to slow inflation. Some Fed officials have even warned that they will deliver a series of 0.50% rate hikes. 

Therefore, while investors are a bit welcoming about rate hikes, there is a general feeling that overdoing them could have an implication on the economy. 

The next key catalyst for the US dollar index will be the upcoming US consumer confidence data scheduled for Tuesday. With inflation being sky high, analysts expect confidence among consumers declined sharply in March.

Consumer confidence is an important economic data because of the importance of the American consumer, which forms the biggest part of the economy. Other key catalysts that will move the DXY index will be the latest American GDP data and the upcoming non-farm payrolls numbers.

US dollar index forecast

The two-hour chart shows that the DXY index has been in an overall bullish trend in the past few months. As a result, it has formed an ascending triangle pattern. In technical analysis, this pattern is usually a bullish sign. It has also moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has tilted lower.

Therefore, the dollar index will likely remain in this range for a while. If this happens, the next key level to watch will be at $98.50.