DXY: US dollar index forms break and retest as bond yields surge

The US dollar index (DXY) jumped sharply as investors focused on the ongoing bond sell-off in the United States. It rose to $95.70,  which is about 1.25% above the lowest level last week.

Bond sell-off

A bond sell-off is happening in the United States and other countries as investors remain worried about central banks. 

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The 10-year bond yields jumped to the highest level in two years on Tuesday. The yield currently stands at 1.88%, which is significantly higher than last year’s low of about 0.99%. 

Similarly, the 30-year bond yield is currently at 2.19%, which is the highest it has been since July last year. Bond yields have an inverse relationship to their prices.

The performance of the bond market is mostly because investors are currently worried about the Federal Reserve. The bank started winding down its quantitative easing policy in November last year and is expected to wind it down this year. 

Also, the Fed has hinted that it will implement about 3 rate hikes this year. If this happens, these rate hikes will be the most since 2018 when the bank made four rate hikes.

The US dollar index as the greenback rose against most currencies, including the euro, sterling, and emerging market currencies like the South African rand.

Later today, the DXY index will still react to the latest US bond market. Another key catalyst will be the latest UK consumer inflation data. Analysts expect that the country’s consumer inflation remained at elevated levels in December. The pound is the second-biggest member of the dollar index.

The dollar index will also react to the latest Canadian inflation data and American building permits and housing starts data.

Dollar index forecast

The daily chart shows that the US dollar index has done well lately. It has managed to bounce back and retest the key resistance at $95.66, where it struggled to move below recently. This means that the index has formed a break and retest pattern and moved slightly above the 23.6% Fibonacci retracement level.

Therefore, the index will likely resume the bearish trend since a break and retest is usually a bearish sign. If this happens, the next key support to watch will be last week’s low at $94.67.