US dollar index (DXY) has crashed. Buy the dip or sell the rip?

By: Crispus Nyaga
Crispus Nyaga
Crispus is a Financial Analyst for Invezz covering the stock, cryptocurrency and forex markets. He’s an experienced analyst with… read more.
on May 19, 2022
  • US dollar index declined sharply on Thursday.
  • This happened as the CBOE volatility index retreated.
  • Existing home sales declined sharply in April.

The US dollar index (DXY) took a breather as market volatility declined. The index is trading at $102.57, which is the lowest it has been since Thursday last week. It has fallen by more than 2.1% from its highest level this month.

Volatility sinks

The US dollar index has been in a strong bullish trend in the past few days as market volatility rose and the Federal Reserve chair sounded more hawkish. 

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In a Wall Street Journal session on Tuesday, Jerome Powell reiterated his previous statement that the Fed will continue tightening its policies in the coming months. He also warned that this tightening will lead to some pain in the market.

Volatility then increased when some of the biggest American retailers published weak financial results. On Tuesday, Walmart and Home Depot warned that inflation was affecting their forecasts. And on Wednesday, the Target stock price plummeted after the company published weak results and guidance.

These companies are good barometers of the American economy since consumer spending is its biggest part. As such, investors believe that their results could signal that the American economy is not as strong as was expected. Worse, the firms warned that they could have some layoffs after they over-hired. 

The US dollar index is retreating after the CBOE volatility index declined, signaling that investors are no longer as cautious. The index has fallen by more than 3.5% and is trading at $29.6. 

Meanwhile, the US published relatively weak economic numbers. Existing home sales declined by 2.4% in April to 5.61 million. These numbers came a day after the US delivered weak housing starts and building permit numbers. Additional numbers revealed that the Philadelphia manufacturing index declined to 2.6.

US dollar index forecast

US dollar index

On the 4H chart, the US dollar managed to move below the ascending channel shown in blue. It also crashed below the important support level at $103.21, which was the lowest level on Wednesday. The index has also crashed below the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has moved below the oversold level. Therefore, the index will likely keep falling as bears target the key support level at $102.

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