The US dollar index (DXY) will be in the spotlight this week as investors reflect on last Friday’s nonfarm payrolls report and as the US publishes its March inflation data. The index ended the week at $104.28, down from the weekly high of $105.08.

The US dollar index drifted on Friday after the US published strong economic numbers. According to the Bureau of Labor Statistics (BLS), the economy added over 300k jobs in March, which was better than expectations. The unemployment rate retreated from 3.9% to 3.8% while wage growth continued rising.

These numbers were great. However, a closer look shows that most of the job additions were part-time. Also, the government has been adding a substantial number of jobs in the past few months.

Still, the report means that many analysts and economists have started to change their estimates on the next Fed rate cut. In December, most analysts were expecting the bank would start slashing rates in March. 

Now, many of them believe that the next rate cut will happen in July. Raphael Bostic, an influential Fed official, said that he believes that a fourth-quarter rate cut would be appropriate.

Therefore, with the labor market doing well, the next important data to watch will be inflation, which is set for Wednesday. Economists expect the data to show that the headline Consumer Price Index (CPI) rose from 3.2% in February to 3.4% in March. Core inflation is expected to come in at 3.7%.

There are signs that the country’s inflation will remain at an elevated level for a while. Besides, the price of crude oil has jumped sharply in the past few weeks, with Brent sitting at $91 and West Texas Intermediate (WTI) jumping to $87. 

US inflation has diverged from the European one. As I wrote last week, European inflation dropped to 2.4% in March and is nearing the ECB target of 2.0%. This is an important figure because the euro is the most important part of the US dollar index.

DXY chart by TradingView

The US dollar index peaked at $105.08 on Monday last week and then pulled back sharply afterwards. On the daily chart, the index has formed a double-top pattern at $104.97. In most periods, this pattern is one of the most popular bearish signs. 

On the positive sign, the index has remained above the 50-day Weighted Moving Average (WMA), which is a bullish sign. It has also formed a small hammer pattern, a sign of a bullish reversal.

Therefore, because of the strong fundamentals, there is a likelihood that the greenback will bounce back and retest the upper side of the double-top pattern at $104.97. The alternative scenario is where it makes a bearish breakout and moves below $104.

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