US dollar index (DXY) forecast as it forms a head and shoulders pattern

The US dollar index (DXY) rose for the third straight day after the strong American job vacancies data published by the Bureau of Labor Statistics. The index rose to an intraday high of $92.86, which was about 0.95% above the lowest level on Friday. 

US labour market tightening 

The main theme in the market this week has been the US labour market. Last Friday, data by the Bureau of Labour Statistics (BLS) showed that the US added just 235k jobs in August while the unemployment rate dropped to 5.2%. 

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And this week, the federal government ended the giant unemployment benefits program that affected more than 7 million people. As a result, there are concerns that the country’s economic growth will slow down as consumer spending eases. 

At the same time, the American economy has one of the highest vacancy rates in the world. According to the BLS, the economy has more than 10.98 million vacancies that are yet to be filled. Indeed, despite the weak NFPs, the number of vacancies actually increased in August from the previous 10.18 million. 

The next key mover for the US dollar index will be the Fed beige book that will come out on Wednesday. This document will provide a clearer picture about the American economy from key Fed officials. 

The DXY index will also react to the September European Central Bank (ECB) interest rate decision scheduled for Thursday. Analysts expect that the bank will maintain its interest rate and quantitative easing policies unchanged. This decision will be important for the dollar index because the euro is its biggest constituent. 

On Wednesday, the Bank of Canada left its interest rate intact at 0.10%. It also maintained its quantitative easing policies unchanged. And on Tuesday, the Reserve Bank of Australia (RBA) decided to taper its asset purchases while extending the duration. 

US dollar index analysis 

A quick look at the daily chart shows that the DXY index has formed a head and shoulders pattern. The head of this pattern is at last month’s high of $93.70 while the shoulders are at $93.17. The neckline of this pattern is at $91.80.In price action analysis, the head and shoulders pattern is usually a bearish signal. The Relative Strength Index (RSI) has been on an upward trend. Therefore, the index will likely resume the downward trend as investors target the key support at $91.50.

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