US dollar index cup and handle points to more gains

The US dollar index (DXY) price formed a cup and handle pattern as concerns about the Federal Reserve and the economy remain. It is trading at $108.63, which is slightly below this month’s high of $109.30. The price is about 3.8% above the lowest level this month. 

Hawkish Fed sentiment

The DXY index has been in a strong bullish trend in the past few weeks. The rally accelerated after the Federal Reserve published minutes of the last monetary policy meeting.

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These minutes showed that the committee was still concerned about the soaring inflation. Precisely, they are worried that inflation will get entrenched in the economy. At the same time, members are concerned that they have hiked interest rates at a faster pace which could lead to a hard landing.

Last month’s meeting happened before the Bureau of Labor Statistics (BLS) published the latest jobs and inflation numbers. The data revealed that the labor market is tightening as the economy added over 528k jobs in July and the unemployment rate dropped to 3.5%.

Meanwhile, the falling gas prices has led to relatively lower inflation. The headline consumer price index (CPI) dropped from 9.1% in June to 8.7% in July. 

Still, Fed speakers have insisted that higher rates are necessary until inflation shows signs of sustained decline. In a statement on Tuesday, Neel Kashkari insisted that the Fed will continue hiking interest rates in the coming weeks.

The US dollar index has also risen even as more data sent warning signs about the American economy. For example, the services PMI declined to 44, which was the lowest level since 2020. The composite PMI also continued retreating.

Further, additional numbers revealed that new, pending, and existing home sales dropped sharply in July. Building permits and housing starts also dropped during the month.

US dollar index forecast

The four-hour chart shows that the DXY index has been in a strong recovery pace in the past few days. In this period, it has managed to move above the 25-day and 50-day moving averages. Additionally, it formed a cup and handle pattern that is shown in black.

The Relative Strength Index (RSI) moved from the overbought level to 57. Therefore, the DXY will likely continue rising as bulls target the next key resistance level at $110. A move below the support at $108.21 will invalidate the bullish view.

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