The US dollar index (DXY) sell-off accelerated in May as the Federal Reserve insisted that it will not tighten even as the economy rebounds. It fell to $89.56 in May, which was 13% below the highest level in 2020.
US dollar index outlook
The US dollar index declined sharply in May even after a series of positive economic numbers from the United States. The numbers showed that the US labour market continued to tighten as the country continued to reopen. Last week, data showed that the initial jobless claims declined to the lowest level since the pandemic started.
Are you looking for fast-news, hot-tips and market analysis?
Sign-up for the Invezz newsletter, today.
Further data showed that the US inflation continued to rebound. The headline consumer price index (CPI) rose to 4.2% in April, the highest level in years. Similarly, the producer price index jumped by 6.2% in April as commodity prices continued to jump.
And last week, data showed that the producer consumption expenditure (PCE) rose at the highest level in more than two decades. The PCE is an important number since it is the Fed’s most preferred inflation gauge.
The dollar index also reacted to the strong retail sales, industrial production, and preliminary manufacturing and services PMI numbers.
Therefore, despite these positive numbers, the dollar index declined because the Federal Reserve has remained adamant that it won’t hike interest rates or ease its asset purchases program. This is even as other central banks like the Norges Bank, Reserve Bank of New Zealand, and the Bank of Canada have sounded hawkish.
In June, the DXY will react to the latest US employment numbers that will come out this Friday. These numbers will provide a good picture of the labour market of the country. The currency will also react to the Fed decision that will happen on June 16 and the latest inflation and retail sales numbers.
DXY technical forecast
Turning to the weekly chart, we see that the dollar index is attempting to move below the support at $89.27, which was the lowest level on January 11. The pair’s downward trend is also being supported by the 25-day and 50-day exponential moving averages (EMA) while the Stochastic Oscillator dropped to the oversold level. Therefore, the index will likely drop to the next key support at $88.21 in June this year.