US dollar index (DXY) forecast ahead of US PCE inflation data

The US dollar index (DXY) has staged a strong comeback as investors positioned themselves for a higher-for-longer environment. It soared to over $105, up from this week’s low of $104.10. It has jumped against most currencies like the euro, sterling, Japanese yen, and the Swiss franc.

US PCE inflation data ahead

The US dollar index surged after a report by the Conference Board revealed that consumer confidence jumped sharply this month. It soared to 102, the first monthly increase since February this year.

Consumer confidence is one of the most important leading indicators because their spending is the biggest part of the economy. Highly confident consumers spend more, boost economic growth, and lead to a higher inflation rate.

The next important US dollar news will be the upcoming US GDP numbers. Economists expect the data to show that the economy expanded by 1.6% in Q1, a sharp decline from the fourth quarter’s growth of 3.6%. 

These numbers will have a minimal impact on the US dollar because they will be the second estimate. Therefore, traders will be focusing on the upcoming Personal Consumption Expenditure (PCE) inflation numbers.

Economists believe that the headline and core PCE figures held steady in April. The median estimate is that the two slowed to 0.3% and 0.2% on a MoM basis in April. On an annual basis, the expectation is that the two numbers slowed to 2.6% and 2.7%, respectively.

The PCE figures are seen as better inflation indicators than the Consumer Price Index (CPI) because it looks at urban and rural places. On the other hand, the CPI looks at price movements in urban areas.

The dollar has jumped as investors expect that the Federal Reserve will leave interest rates higher for longer. JP Morgan’s James Dimon and Goldman Sachs’s David Solomon don’t see the Fed cutting interest rates this year. That, together with the weak Treasuries auction market, explains why US bond yields have jumped.

The upcoming flash European inflation numbers are the other potential catalyst for the US dollar index. Economists expect the report to show that the bloc’s CPI rose from 2.4% to 2.5% while the core CPI rose to 2.7%. These numbers will come as the ECB prepares to slash interest rates next week.

US dollar index forecast

DXY chart by TradingView

Turning to the daily chart, we see that the DXY index has rebounded and moved above the psychological level of $105. This rebound happened after the index found a strong support at the lower side of the ascending channel shown in blue.

The index has also crossed the 50-day and 25-day Exponential Moving Averages (EMA) while the Relative Strength Index (RSI) has risen above the neutral point. Therefore, the index’s outlook is moderately bullish, with the next point to watch being at $106.5, its highest swing this year.