The US dollar index (DXY) pulled back on Monday morning ahead of the important US and UK inflation numbers. The index, which tracks the greenback against a basket of currencies, retreated to the psychologically crucial support level at $104, a few points below last week’s high of $104.61. 

This will be an important week for the US dollar index and other financial assets. The Bureau of Labor Statistics (BLS) will publish the US inflation numbers on Tuesday. These are crucial figures because they form part of the Federal Reserve’s dual mandate.

The other part of this mandate is the labour market, which has been quite strong in the past few months. Data by the BLS revealed that the American economy added over 350k jobs in January while the unemployment rate remained unchanged at 3.7%. The US also has over 8 million unfilled vacancies.

Economists polled by Reuters expect the data will show that the country’s inflation eased slightly in January. The median estimate is that the headline inflation rose by 2.9% in January after rising by 3.4% in the previous month. Core inflation is expected to come in at 3.8%.

These numbers will be important because the Fed has committed to be data-dependent when making its next monetary policy decisions. As such, if the figures are higher than expected, it means that the chances of a rate cut in March will drop. As shown below, the Fed rate monitor tool shows that 80% of economists expect the Fed to leave rates unchanged in March.

The other important US dollar index news will be the UK inflation report scheduled for Wednesday of this week. Like in the US, analysts expect the report to show that the country’s inflation dropped slightly in January. The housing sector is a major issue in the UK as prices continue rising. 

Activities in the UK are important for the DXY index because the British pound is an important constituent. The other notable constituent currencies in the index are the euro, Japanese yen, and the Swiss franc.

DXY index chart by TradingView

Turning to the daily chart, we see that the DXY index has rebounded from the year-to-date low of $100 to the current $104. The most important aspect is that it has formed an inverse head and shoulders pattern, which is a popular bullish sign. It has now pulled back slightly from the neckline of this pattern.

Further, the US dollar index has moved above the 50-day and 200-day Exponential Moving Averages (EMA) and the two are about to form a golden cross. This means that the index will likely continue rising in the coming weeks, with the next reference point to watch is $105. A move above that level will bring the resistance at $106 to view.

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