US dollar index: DXY outlook ahead of US CPI, ECB decision

The US dollar index (DXY) retreated slightly on Monday as investors wait for the upcoming US inflation and retail sales data. The index will also react to the upcoming interest rate decision by the European Central Bank (ECB) set for Thursday. It was trading at $105, a few points below this month’s high of $105.13.

US inflation, retail sales, and ECB decision

The DXY index rallied last week, as I wrote here. This rally happened as the price of crude oil jumped, leading to concerns about inflation. Brent jumped to $90 while West Texas Intermediate rose to $87 after Russia and Saudi Arabia continued their supply cuts.

The dollar’s rally eased after several Fed officials like Christopher Waller and Lori Logan pointed to a pause in September. Most analysts believe that the bank will pause at 5.5% in this meeting as it observes the impact of the past rate hikes.

Events scheduled this week will likely have an impact on the next Fed decision and the US dollar index (DXY). For example, the US will publish the latest consumer price index (CPI) data on Wednesday.

Economists polled by Reuters expect the data to show that prices remained at an elevated level in August as gasoline rose. Precisely, they expect that the headline CPI rose from 3.2% in July to 3.4% in August. On the positive side, core CPI, which excludes the volatile food and energy, is expected to drop to 4.2%.

The other important catalyst for the DXY index will be the latest US retail sales numbers scheduled for Thursday. Economists believe that retail sales rose by 0.2% in August while core sales jumped by 0.4%. These numbers will show that consumer spending is still strong.

Meanwhile, the US dollar index will be affected by Thursday’s ECB decision. Activities by the ECB are important because the euro is the biggest component of the US dollar index. Analysts see the ECB leaving rates intact at 3.75%.

US dollar index forecast

The DXY index has been in a strong bullish recovery in the past few weeks. It has now retested the important support at $104.63, the highest point on May 20th. Most importantly, it is about to form a golden cross pattern, which happens when the 50-day and 200-day moving averages make a bullish crossover.

Therefore, the outlook for the index is bullish, with the next key level to watch being at $106, the highest point on March 7th. The stop-loss of this trade is at $103.24.