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The US Dollar Index (DXY)

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On February 11th, the United States declared that Russia could invade Ukraine at any time. Since then, the US Dollar Index has risen from a low of 95.64 on February 11th to a high of 99.42 today, a nearly 4% increase in less than a month. The US dollar, Japanese yen, and gold are a few examples of safe haven assets that investors purchase when risk decreases. Markets despise uncertainty. There are numerous reasons why the DXY could continue to rise, including a flight to safety, higher inflation, or technical reasons. 

As a result of the uncertainty surrounding the start of the Russia/Ukraine conflict, stocks began to fall and sentiment shifted from “risk-on” to “risk-off.” Flows began to enter the DXY.

However, war isn’t the only reason the DXY is rising. It is also rising as a result of rising inflation and interest rate expectations. The higher the inflation rate, the higher the cost of money and the greater the likelihood that interest rates will be raised by the Federal Reserve. 

On Thursday, the United States released its February CPI (Consumer Price Index, a key measure of inflation). For February, a YoY reading of 7.9 percent is expected. If this figure is “as expected,” it means that prices have risen nearly 8% from a year ago. Fed Chairman Powell has already stated that interest rates will be raised on March 16th. However, investors anticipate more to come, driving up the price of DXY.

Since May 2021, the US Dollar Index has been steadily rising in an orderly channel. In late November, the index briefly traded above the channel’s top trendline to 96.94, only to return inside the channel. When price fails to break above one side of a channel, it frequently moves to test the other side. In January, the price returned to the channel and tested the bottom trendline near 94.66. Since then, the price has risen steadily. 

On Friday, the DXY closed above the channel’s top trendline and above horizontal resistance.

Today, it broke through additional horizontal resistance as well as the 161.8 percent Fibonacci extension from the high of January 28th to the low of February 4th, near 98.87. If price is to rise further, it must first break through the psychological round number resistance level of 100.00, then the horizontal resistance level of 100.87, and finally the March 2020 highs of 102.99. However, the RSI is in overbought territory, indicating that the DXY is due for a pullback.

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