Should you buy US dollar index (DXY) in 2021 as inflation surges?

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Written on Nov 10, 2021

Reading time 3 minutes

The US dollar index rose slightly after the latest US inflation data.
The headline consumer inflation rose to a 30-year high of 6.2%.
The index is on the cusp of a major bullish breakout.

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The US dollar index (DXY) tilted higher on Wednesday after the US published strong consumer inflation data. The index rose to a high of $94.42, which was substantially higher than this week’s high of $93.88.

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US inflation data

Consumer prices in the United States soared at the fastest pace in more than 30 years as energy prices and the ongoing supply shortage continued.

According to the statistics bureau, the headline consumer price index rose by 6.2% year-on-year in October. This was the highest level since 1991. It was also higher than the median estimate of 5.8% by a panel of Wall Street economists. The CPI rose by 0.9% on a month-on-month basis.

Meanwhile, the core CPI, which excludes the volatile food and energy prices, rose from 4.0% in September to 4.6% in October. Again, this was a better number than the median estimate of 4.3%.

These numbers mean that Americans are paying a substantially higher price for most of their basic needs. For example, gasoline prices have jumped to more than $4 per gallon in some states like California.

This surge in prices has been attributed to several things. For one, the price of crude oil has surged to the highest level in more than 7 years. This is after OPEC+ maintained a policy to increase supplies at a relatively slower pace.

Meanwhile, natural gas prices have remained under pressure because of the ongoing Russian controls. Coal prices have also jumped sharply as companies have slowed down production and investments because of climate change policies.

Therefore, with the US inflation rising and the unemployment rate falling, the Federal Reserve has embraced a relatively hawkish tone. It has already started tapering its asset purchases. Therefore, with inflation soaring, there is a likelihood that it will maintain a more hawkish tone.

US dollar index forecast

The four-hour chart shows that the US dollar index rose sharply and then erased some of its gains after the latest US inflation data. In general, the index has struggled to move above the key resistance level at $94.50. It is also slightly above the 25-day and 50-day moving averages.

Notably, it has also formed an inverted head and shoulders pattern. Therefore, there is a likelihood that the price will soon bounce back. If this happens, the next key level to watch will be $95.