The US dollar index (DXY) is hovering near the highest level in June 2020 as investors continue worrying about the rising risks of stagflation. The index is trading at $95.12, which is about 6.30% above the lowest level in July.
Stagflation risks
The US dollar index has been in a strong bullish trend in the past few weeks as investors worry about stagflation. This is after the recently weak US GDP numbers coupled with the surging inflation.
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Data published recently showed that the American economy expanded by about 2% in the third quarter. This was relatively weak than the previous quarter’s increase of more than 5%.
And last week, data by the American government showed that the country’s inflation rose by 6.2% in October. This was a better number than the median estimate of 5.8%. At the same time, the country’s inflation was the highest it has been since 1991.
Therefore, there is an increasing risk that the US is slowly moving towards stagflation. Stagflation is defined as a period when a country is facing significantly high inflation and low economic growth. In addition to deflation, stagflation is one of the worst part that a country can be in.
At the same time, the bond market is hinting at potential high-interest rates in the coming months. The 10-year bond yield has jumped to the highest level in months.
Similarly, the 30-year yield has jumped sharply in the past few weeks. That price action is usually a sign that the Fed will continue tightening in the coming months.
US retail sales ahead
This week, the most important mover of the US dollar index will be the US retail sales numbers that will come out on Tuesday. Analysts expect the data to show that the country’s retail sales jumped by 1.1% in October after rising by 0.7% in the previous month. Core retail sales are expected to have risen by 0.8% in October.
Strong US retail sales will send a signal that the economy is doing relatively well. Besides, recent data showed that the country’s unemployment rate declined to 4.6% in October.
The DXY index will also react to the data dump from the United Kingdom. The country will publish the latest employment, inflation, and retail sales data this week.
Therefore, while the overall trend of the US dollar index is bullish, there is a likelihood that it will take a breather and decline to about $94.80.
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