US dollar index (DXY) Elliot wave pattern hints at a possible rebound

The US dollar index (DXY) is in its third straight day in the red as forex investors react to the recent nonfarm data, US stimulus, and the recent performance of cryptocurrencies. The index is trading at $90.70, which is 1% below Friday’s high of $91.57.

US dollar index
Dollar index chart

Twin-deficit in the US

The dollar index weakness started on Friday when the US released weak employment numbers. In total, the country created just 40,000 jobs in January after shedding 140,000 in the previous month. Therefore, investors believe that the American economy will take a longer period to recover. 

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Meanwhile, in Washington, politicians are attempting to pass another $1.9 trillion stimulus package. This will bring the total stimulus to more than $2.8 trillion. As such, some investors are concerned about twin-deficit in the US. This refers to the widening budget deficit and trade deficit. In a note, an analyst at Commonwealth Bank said:

“The bottom line is a large stimulus is highly likely to pass soon, exacerbating the widening in the U.S. current account deficit, and weighing on the USD.” 

Another analyst said:

“If there’s a lot of potatoes available, it’s going to be cheaper. If there’s a lot of dollars available, it’s going to be weak.”

The dollar index is also falling because of the slow transition to digital currencies. Yesterday, Tesla revealed that it had bought Bitcoin worth about $1.5 billion. This makes it the most high-profile company that has invested in the currency. Others are Square, MicroStrategy, and MassMutual. Therefore, other companies will likely copy Tesla and invest in the currency.

The US dollar is also falling ahead of the latest US inflation numbers that will come out tomorrow. Economists expect the data to show that the headline and core consumer price index (CPI) increased by 1.5% in January. 

Still, there are signs that the rate of inflation will reach 2.0% later this year. For example, as shown below, the 10-year breakeven inflation rate has jumped to the highest level since 2018. 

The 10-year breakeven inflation rate

US dollar index technical outlook

Dollar index
US dollar index technical chart

The US dollar index has been in a strong uptrend, gaining by more than 1.70% since January. On the four-hour chart, the index has formed an Elliot wave pattern. In fact, the index is in the fourth wave of the wave. The price is also along the lower line of the Bollinger Bands. Therefore, in the near term, there is a likelihood that it will rebound as it enters the bullish part of the Elliot wave.

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