DXY: US dollar index smacks lower as US consumer confidence rebounds

DXY: US dollar index smacks lower as US consumer confidence rebounds
  • The US dollar index (DXY) declined by almost one per cent as optimism returned in the market.
  • New home sales in the United States made a modest recovery in May after falling in April.
  • Consumer confidence also improved as US states started to reopen their economies.

The US dollar index (DXY) declined by almost a percentage point as investors remained optimistic about the economy. The index also reacted to the positive housing and consumer confidence data from the US.

DXY falls
US dollar index drops

US dollar index falls as demand for foreign currencies rose

Many countries have started to reopen their economies following the lockdowns that started in March. Yesterday, Shinzo Abe declared victory as the number of new infections in Japan declined sharply.

Other countries that have started to lift their restrictions are Germany, Italy, Spain, Australia, and New Zealand.

As they reopen, investors believe that the demand for their currencies will rise. As seen in the YTD chart above, the dollar index rose to the highest level this year at the peak of the coronavirus pandemic.

The Canadian dollar, which rose by more than 1.25%, was the best-performing currency in the US dollar index. It was boosted by higher oil prices, with Brent and WTI rising by 1.60% and 3.0% respectively.

The loonie was followed by the Swiss franc, which rose by 0.60% and the Swedish krona, which rose by 50 basis points. The British pound and the euro rose by 1.32% and 0.67% respectively.

US new home sales stabilise

The US dollar index (DXY) also reacted to the weak new home sales data released by the Census Bureau. The data showed that new home sales made a modest recovery in May. The sales rose by 0.6 per cent after plunging by 13.7% in April.

In total, the new houses sold rose to 623,000 from the previous 619,000. The number of houses listed for sale rose to 325,000 while the median sales price was 309,000. The bureau said:

“Sales of new single-family houses in April 2020 were at a seasonally adjusted annual rate of 623,000, according to estimates released today. This is 0.6 percent (±14.9 percent), above the revised March rate of 619,000, but is 6.2 percent (±17.1 percent), below the April 2019 estimate of 664,000.”

These numbers came a few days after another data set released by the National Realtors Association (NRA) showed that sales of existing homes declined by almost 18 per cent in April.

With the unemployment rate surging, analysts expect that sales of new and existing homes will continue to lag this year.

US consumer confidence creeps back

Consumer spending is the biggest contributor to the US economy. Therefore, investors pay close attention to consumer confidence data that is released by several organisations.

According to the Conference Board, consumer confidence crept back in May as more states started to reopen their economies. The confidence was at 86.6, which was higher than the previous 85.7.

The board said that the consumers’ assessment of the current conditions declined in May. They were nonetheless positive about the short-term outlook of the economy. Those consumers expecting that business conditions will decrease in the next six months fell to 21.4% from 25.1%.

Consumers continued to worry about the labour market. Those consumers expecting the number of jobs to increase in the next few months declined while those expecting fewer jobs declined. In a statement, Lynn Franco said:

“The severe and widespread impact of COVID-19 has been reflected in the Present Situation Index, which has plummeted nearly 100 points since the onset of the pandemic. Short-term expectations moderately increased as the gradual reopening of the economy helped improve consumers’ spirits. However, consumers remain concerned about their financial prospects.”

US dollar index technical outlook

US dollar index
US dollar index forecast

The US dollar index (DXY) is trading at 99.00, which is lower than the YTD high of 102.99. On the weekly chart, the price is between the 61.8% and 78.2% Fibonacci retracement level. It is also slightly higher than the 100-week and 50-week exponential moving averages. Additionally, the volatility, as measured by the Average True Range (ATR) has declined to the lowest level since March 2017.

I expect the index to move slightly lower as bears attempt to retest the 50-day EMA at 98.25.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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