Home Forex Market Analysis US Dollar Index Has Bounced Back. Will the Gains Hold?

US Dollar Index Has Bounced Back. Will the Gains Hold?

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US Dollar Index Has Bounced Back. Will the Gains Hold?

The US dollar index (DXY) bounced back on Thursday morning as US bond yields rose ahead of the important GDP and inflation numbers. It rose to 90, which was 0.60% above the lowest level during the week.

US dollar index bounces back

The US dollar tumbled earlier this week as most developed and emerging market currencies rose to a multi-month high. The euro rose after the relatively strong German business confidence data, while the British pound rose because of reopening optimism. Other currencies that jumped against the dollar were the Canadian dollar, Swiss franc, and Chinese yuan.

The dollar bounced back as investors waited for the second reading of US first-quarter GDP data. The numbers are expected to reaffirm that the country’s economy rose by more than 6%, helped by robust consumer spending because of the $900 billion and $1.9 trillion stimulus passed during the quarter. Consumer spending is the most important section of the American economy. Business and government spending also rose.

The US dollar index will also react to the latest initial jobless claims numbers. Economists expect the data to show that the number of Americans filing for initial claims dropped to 425,000 last week. This will be lower than the previous week’s high of 444,000. It will also be the lowest figure since the pandemic started.

The most important figure will come out on Friday when the statistics agency publishes the personal consumption expenditure (PCE). This is an important gauge of inflation in the United States that is watched closely by the Federal Reserve. Analysts expect the data to show that the PCE increased by 2.9% year on year, the highest figure in more than a decade. That will be an increase from the previous month’s 1.8%.

The data will come three weeks after the United States government published strong consumer and producer price index data. The CPI rose by 4.2%, while the PPI rose by 6.2%, helped by the low base of the pandemic year.

Fed tightening ahead?

The Fed has insisted that the current inflationary numbers are transitory and that the economic recovery is still uneven. As a result, the bank believes that the current period of easy money policies will remain for a while.

However, the bank could get under intense pressure if the upcoming numbers show the same strength of the economy. Most importantly, it will be pressured by other global central banks. For example, the Bank of Canada has already started to taper its asset purchases. 

Similarly, the Norges Bank has said that it will start to tighten later this year while the Bank of England (BOE) is considering tapering its asset purchases. On Wednesday, the Reserve Bank of New Zealand (RBNZ) hinted that it will start hiking in 2022. This is notable since the US economy is doing better than its peers in Europe. 

The dollar index rose on Thursday morning as US bond yields rose. The yields on the 10-year rose to 1.579%, while the 30-year rose to 2.263%.

Dollar index analysis

The four-hour chart shows that the US dollar index has bounced back from its lowest level this week. It also managed to move above the upper side of the descending channel. Further, the 25-day and 15-day Weighted Moving Averages (WMA) have made a bullish crossover pattern. It is also slightly below the 23.6% Fibonacci retracement level. 

US dollar index chart

Therefore, the index may keep rising ahead of the US PCE data on Friday. However, in the long-term, the pair remains in an overall bearish trend.

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