DXY: US dollar index slumps to 4-month low, in line with ING estimates

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 wife, son,… read more.
on May 18, 2021
  • The US dollar index declined to the lowest level in four months.
  • The decline happened after Federal Reserve officials pointed to more easing.
  • This decline was in line with what analysts at ING predicted last week

The US dollar index (DXY) sell-off resumed as fears of high interest rates in the United States started to ease. The index declined to $89.75, which was the lowest level since February 25.

Dollar index
US dollar index price action

US dollar index sell-off resumes

The DXY rose last week after the relatively strong consumer and producer inflation data from the United States. The overall consumer inflation data rose by 4.2% year-on-year in April. In the same period, the producer price index rose by 6.2%, which was the highest number since 2011.

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These numbers, coupled with the tightening labour market, pushed many investors to start pricing in a change of policy by the Federal Reserve.

However, this week, the fear of inflation has eased after several Fed officials hinted at the status quo. In an interview yesterday, Raphael Bostic of Atlanta Fed said that the Fed will maintain interest rates at the current level. He pointed to the fact that the economy was still experiencing an uneven recovery. The statement was in line with what Fed’s Robert Kaplan, who pointed to a rate increase in 2022.

The declining dollar is in line with what analysts at ING wrote last week. They said:

“We don’t expect the dollar rally prompted by high US April CPI to have persistent legs as imminent Fed tightening is unlikely and the deeply negative front-end US rate should dominate and weigh on USD. DXY to move below 90.00 in the coming weeks.”

The US dollar index decline was broad-based. The currency declined by more than 0.50% against the euro and 0.46% against the sterling. The sterling rose after the upbeat UK jobs numbers. The dollar also declined by 0.60% against the Swiss franc and by 0.30% against the Swedish krona.

DXY technical forecast

DXY
DXY price action

The four-hour chart shows that the DXY declined to $89.75 today. As it fell, it moved below the important support at $89.65. It has also declined below the 25-day and 15-day exponential moving averages (EMA) while the MACD has dropped below the neutral line. Similarly, the Relative Strength Index has moved to the oversold level of 30. Therefore, the path of least resistance for the dollar index is lower. There is a possibility that it will drop to $89.5 in the near term.

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