DXY: US dollar index forecast ahead of US inflation data

The US dollar index (DXY) price held steady on Monday morning as investors continued to reflect on the Fed decision and strong non-farm payrolls (NFP) data. The index is trading at $94.28, which is a few points below last week’s low of $94.55.

US inflation data ahead

The US dollar index was in the spotlight last week as investors reflected on the latest interest rate decision by the Federal Reserve. The Fed decided to leave interest rates between 0% and 0.25% where they have been since the pandemic started.

The Fed also decided to slash the size of its $120 billion per month quantitative easing (QE) program. It slashed these purchases by about $15 billion and it will continue cutting lowering them by the same amount in the next few months.

The speed of the tapering will depend on how quickly the US economy recovers from the pandemic. There are signs that the economy is recovering at a relatively faster rate. For example, data published recently showed that home prices have surged recently.

On Friday, data by the Bureau of Labor Statistics (BLS) showed that the labour market is tightening as well. The economy added more than 540k workers in October while the unemployment rate declined to 4.6%. This is the lowest it has been since the pandemic started. Other sectors of the economy are doing well too.

The US dollar index will next react to the upcoming American inflation data that are scheduled for Wednesday this week. With energy prices rising, analysts expect that the country’s headline inflation rose to 5.8% in October. This will be a bigger increase than the previous 5.4%. 

Still, some analysts believe that inflation is not as high as the numbers say. By looking at the month-on-month numbers, they argue that prices are relatively stable.

US dollar index forecast

The DXY index is trading at $94.28, which is slightly below last week’s high of $94.60. On the four-hour chart, the index is relatively above the 25-day and 50-day moving averages. It is also a bit lower than the important resistance at $94.50, which is the upper side of the cup and handle pattern that is forming. 

The Relative Strength Index (RSI) has moved below the overbought level of 75 to the current 56. Therefore, the index will likely break out higher in the coming days.