Home Forex Market Analysis US Dollar Index (DXY) Forecast Ahead of US Inflation Data

US Dollar Index (DXY) Forecast Ahead of US Inflation Data

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US Dollar Index (DXY) Forecast Ahead of US Inflation Data

The US dollar index (DXY) held steady on Monday morning as investors waited for the upcoming American inflation and retail sales numbers. The index was trading at $92.65, which was slightly above last week’s low of $92.33, with FED tapering on the line before 2021 ends.

Inflation data in focus

The US dollar index is a benchmark that tracks the performance of the greenback by comparing it with a basket of currencies. The euro has the biggest weight in the index. Therefore, the biggest catalyst for the DXY last week was the interest rate decision by the European Central Bank (ECB). The bank decided to leave interest rates intact and slow down the pace of its asset purchases.

This week, the key catalyst will be the official American inflation data scheduled for Tuesday. In general, analysts expect the data to show that consumer prices remained high in August. Besides, the shortage of most items, including automobiles, remained high. Also, the country’s wage growth rose by 4.3%, meaning that companies could transfer some of this cost to consumers.

Economists polled by Reuters expect the country’s inflation will come in at 5.3%, which will be lower than the previous month’s 5.4%. The core CPI, which excludes volatile products, is expected to come in at 4.2%, down from the previous 4.3%. These numbers will be substantially higher than the Fed’s target of 2.0%.

The CPI data will come a few days after the Bureau of Labor Statistics (BLS) published the latest producer price index (PPI) data. These numbers showed that the PPI and core PPI declined slightly on a month-on-month basis. However, the PPI expanded at the fastest pace since 2011 on a year-on-year basis.

Federal Reserve tapering?

At the same time, the CPI will come a few days after the US published the August employment data. The numbers showed that the economy added just 235k jobs while the unemployment rate declined to 5.2%. Wages rose by 4.3% while the participation rate remained at 62.7%.

Therefore, with the unemployment rate falling, and with inflation comfortably above the Fed’s target of 2.0%, analysts believe that the Fed will likely start tapering in the fourth quarter. 

A hawkish Federal Reserve tends to be positive for the US dollar index. In his recent statement at the Jackson Hole Summit, the Fed chair said that the bank will start slowing down its purchases provided that the economy holds steady.

The next main catalyst for the DXY will be the US retail sales scheduled for Thursday. Data compiled by Investing.com shows that analysts expect the data to show that retail sales dropped in August as prices rose. If they are correct, the falling retail sales will be a continuation of what has been happening in the past few months.

Other key numbers that will move the US dollar are the Eurozone inflation data scheduled for Friday and the UK jobs and inflation numbers. 

US dollar index forecast

The daily chart shows that the DXY index rose to a key resistance at $93.45 this month. This was an important level since it was the highest point since March 30th. It is also along the 25-day and 50-day moving average and along the 23.6% Fibonacci retracement level. It is also below the key resistance level at $93.45 while the Relative Strength Index (RSI) has moved to 50.65. Therefore, a bullish confirmation will happen if the price rises above $93.45. 

The daily chart shows that the DXY index rose to a key resistance at $93.45 this month.

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