DXY: Dollar index forecast ahead of the US consumer inflation numbers

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on May 11, 2021
  • The US dollar index weakness continued ahead of US CPI data.
  • Economists expect the data will show that consumer prices surged last month.
  • Better than expected numbers will be bullish for the US dolar.

The US dollar index (DXY) declined to the lowest level since February 25 ahead of the closely watched US consumer price index (CPI) data. It dropped to $90, which is 3.5% below its highest level on March 31st.

DXY chart

US consumer inflation data ahead

The US will publish the latest CPI data on Wednesday. These are important numbers because they tend to influence monetary policy, which in turn affects the US dollar. 

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Economists polled by Reuters expect the data to show that the overall CPI rose by 0.2% on a month-on-month (MoM) basis. This will be a drop from the previous increase of 0.6%. They also see the number rising by 3.6% on a year-on-year basis. Still, the latter number will not offer a good comparison since the CPI declined sharply at the onset of the pandemic.

Analysts also expect the core CPI will rise by 0.3% and by 2.3% on a YoY basis. This will be the best performance since January last year. 

The inflation data comes at a crucial time for the US economy. On Friday, data showed that the labour market was shaky as the economy added just 266,000 jobs and the unemployment rate rose to 6.1%. Still, according to the National Federation of Independent Business (NFIB) showed that many small companies were struggling to find workers. 

The data will also come at a time when many commodities have surged. For example, lumber prices have jumped by more than 350% in the past 12 months while crude oil and gasoline have jumped by more than 150% and 140%, respectively. This week, copper and iron ore rose to an all-time high. Further, shipping costs have risen because of the surge in demand for goods globally. 

A stronger CPI will be bullish for the US dollar index. On the other hand, a weaker CPI will be bearish for the index because it will give the Fed more room before hiking. 

US dollar index technical forecast

Dollar index
Dollar index technical chart

The four-hour chart shows that the US dollar index has been in a steep downward trend. The price is between the lower and middle lines of the Bollinger Bands. It is also slightly above the dots of the Parabolic SAR while oscillators like the Stochastic and MACD are declining. Therefore, the index will keep falling, with the next target being at $89.50, which is about 0.60% below the current level.

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