The US dollar index (DXY) is in a tight range as investors reflect on the surging US inflation and the rising hopes of an infrastructure deal. It is trading at $91.86, which is about 0.60% below the highest level this month.
US economic progress
The US economic growth is accelerating, helped by the accommodative policies by the Federal Reserve and the robust government spending. This progress is set to accelerate now that the Biden administration is expected to get its infrastructure deal. The Senate is about to pass a $1 trillion infrastructure package that will see the government build roads, bridges, and other transit projects.
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The US dollar index is also reacting to recent data that pointed to higher inflation in the US. The personal consumer expenditure (PCE), rose by 3.9% in May, the fastest growth since 2008. The PCE is the Fed’s favourite inflation tool. Earlier this month, data revealed that the headline consumer price index (CPI) rose by 4% in May while the producer price index (PPI) rose by more than 6%.
The dollar index will react to the latest US consumer confidence data that will come out on Tuesday. Analysts expect the data to show that confidence rose in June as the economy continued to reopen. The data will be followed by the ADP estimate of private-sector payrolls that will come out on Wednesday.
The biggest catalyst for the DXY will be the latest non-farm payrolls that will come out on Friday. Analysts expect the data to show that the unemployment rate fell to 5.6% while the economy added more than 300k jobs. In a note, analysts at ING said that they expect the dollar index will remain rangebound this week as volatility drops. They expect it to remain between $91.30 and $92.40. They wrote:
“Volatility levels are sinking fast again following a brief hiatus around the FOMC meeting. Given the DXY is heavily weighted to low-yielding European currencies and the JPY, the default position is that DXY will be range-bound until further notice. “
US dollar index analysis
The four-hour chart shows that the US dollar index has been in a tight range recently. That has seen it remain at the same level as the 15-day and 25-day exponential moving averages (EMA). It is also slightly above the 23.6% Fibonacci retracement level. Notably, it also seems like it is forming a bearish flag pattern. Therefore, the index will likely break out lower ahead of the NFP data.
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