Should you buy the dollar index ahead of US inflation data?

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 Jan 12, 2022
  • The US dollar index moved below a key support level overnight.
  • The index declined even after a hawkish statement by Jay Powell.
  • Focus shifts to the upcoming American consumer inflation data.

The US dollar index (DXY) crossed an important support level after the latest testimony by Jerome Powell, the Federal Reserve chair. It is trading at $95.55, which is about 1.50% below the highest level last year.

Jerome Powell testimony

The US dollar index declined slightly after Jerome Powell testified in Washington during his confirmation hearings. The Fed chair reiterated that the bank was committed to continuing with the tightening process in a bid to deal with the rising consumer inflation data.

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He hinted that the bank will end its quantitative easing policy in the first quarter. That action will then be followed by a policy to hike interest rates. Analysts expect that the bank will have about 3 hikes this year. But in his statement, he hinted that the bank could do more hikes in its battle against inflation.

The statement came a day ahead of the latest US consumer inflation data. Economists polled by Reuters expect the data to show that the headline consumer price index (CPI) rose to a multi-decade high of 7.0%. The core CPI, which excludes the volatile food and energy prices, is expected to have risen by 5.4% in December.

Inflation has jumped sharply in the past few months because of the easy money policy implemented by the Fed. For example, to support the economy, the bank has printed trillions of dollars through its open-ended quantitative easing program. 

Another reason why consumer inflation has surged is that there have been an ongoing supply chain crisis around the world. Most importantly, energy prices have jumped sharply as well.

Therefore, the US dollar index will likely fall if the US inflation numbers are higher than expected. For one, these figures have already been priced in. Also, analysts will be betting that inflation has started to peak.

US dollar index forecast

dollar index

The daily chart shows that the DXY index has been in a bearish trend in the past few weeks. Overnight, the index managed to cross the key support level at $95.66, where it struggled to move below several times before. It has also moved below the 25-day and 50-day moving averages.

Therefore, there is a likelihood that the DXY index will continue falling in the near term. If this happens, the next key level to watch will be at $95.

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