DXY: US dollar index bucks the trend

4 mins read
DXY: US dollar index bucks the trend
  • The US dollar index had its best day this year today as investors price-in higher rates.
  • It is reacting to the victory by Democrats in Georgia.
  • The index will then react to the December nonfarm payrolls.

The US dollar index (DXY) is having its best day this year today as traders wait for tomorrow’s nonfarm payrolls (NFP) data. The index is trading at $89.81, which is slightly above this year’s low of $89.15.

Sooner rate hikes?

The dollar index is rising after the two Democrats running for the Georgia Senate race defeated the two Republican incumbents. This victory helped to ensure that the Democrats will control the Senate during Biden’s administration.

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The immediate impact of this is that the new administration will unveil a large stimulus package. Democrats have already lined a package worth trillions of dollars to help support the economy. It includes billions of dollars to households and states and local governments.

Their case for more stimulus was made stronger yesterday when ADP released the weak private payroll numbers. The data showed that the economy lost more than 123,000 jobs in December.

In general, a generous stimulus package is usually bad for the dollar index. However, it could also help speed the recovery, which could force the Federal Reserve to hike interest rates. In its recent guidance, the bank expects rates to remain at the current level for the next two years.

Nonfarm payroll ahead

The dollar index will next react to the US nonfarm payroll numbers that will come out tomorrow. Economists polled by Reuters expect the numbers to be relatively weaker. For one, they see the economy adding about 71,000 jobs in December. That will be the lowest figure since April last year when the country lost more than 19 million jobs.

They also expect that the unemployment rate rose from 6.7% to 6.8% in December while the participation rate dropped to 61.4%. This weakness will mostly be because of the lockdowns that states like California, New York, and New Mexico imposed in December.

US dollar index technical outlook

US dollar index
US dollar index

On the daily chart, we see that the dollar index has bounced back today. The price is also along the 50-day and 25-day least squares moving average. At the same time, the Relative Strength Index, which was in the oversold zone, has started to rise also. 

So, is the dollar index turning around? In my view, this is a dead cat bounce since bears seem to be in control. If this is the case, the index will resume the downward trend as bears target the support at $88.21, which is the lowest level in 2018. 

However, if the DXY moves above the resistance at $91, it could signal that bulls are taking charge. As such, you can buy it using a good CFD trading broker and aim for the next resistance at $94.