DXY: US dollar index outlook ahead of US retail sales data

The US dollar index (DXY) pared back earlier losses after the US published the relatively weak consumer price index (CPI) data. The index declined to $92.32, which was the lowest level since September 7. 

US inflation easing

Economic data published by the Bureau of Labor Statistics (BLS) showed that consumer inflation in the country was easing. The headline CPI declined from 0.5% in July to 0.3% in July. This decline was worse than the median estimate of 0.4%. As a result, the index fell from 5.4% to 5.3% on a year-on-year basis. 

In the same period, the country’s core CPI, which excludes the volatile food and energy products, declined from 0.3% to 0.1%. This decline pushed the CPI from 4.3% to 4.0% on a year-on-year basis. Still, the numbers are still above the Federal Reserve’s target of 2.0%.

Therefore, going by the recent trends, there is a possibility that US inflation has peaked as the Fed had predicted. For example, in the past few months, the MoM prices have remained relatively muted. Also, the headline YoY remained unchanged in July. 

Still, analysts at ING believe that prices will remain high for a while. They cited the fact that housing costs, which account for about a third of the CPI basket, tend to lag 12-18 months. Also, they cited a report by the National Federation of Independent Business that showed that 44% of small businesses were considering raising prices. The analyst said:

“Given the decent growth and elevated inflation environment in the US we expect the Federal Reserve to announce the QE taper process in November and expect the Fed to raise interest rates twice in late 2022.”

UK inflation and US retail sales

The next key catalyst for the US dollar index will be the latest UK inflation data scheduled for Wednesday. The data is expected to show that the country’s inflation popped to almost 3% in August. This will be an important number because the British pound is second-biggest constituent of the DXY index after the euro. 

After this, the US dollar will react to the latest US retail sales number expected to come out on Thursday. Analysts expect the data to show that sales declined in August as consumers avoided higher prices. The US will also publish the latest initial jobless claims numbers.

US dollar index forecast

The four-hour chart shows that the DXY index formed a double-top pattern at $92.86 level. The neckline of this pattern was at $92.33, which was today’s low. The index moved below the 25-day moving average while the MACD remains below the neutral level. Therefore, the index will likely maintain the bearish trend as bears target the next key support at $92.00.