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What Will Happen to The Dollar Index After Latest Inflation Data Release?

May 12, 2022

The US dollar index (DXY) retreated slightly as investors wait for the upcoming American consumer inflation data. It is trading at $103.56, which is slightly below the year-to-date high of $104.20.

The US dollar index has been in a strong bullish trend in the past few days as investors react to the changing tone of the Federal Reserve.

In its monetary policy meeting this month, the bank decided to sound more hawkish than expected. The bank admitted that it was wrong on inflation last year. At the time, Fed officials believed that the surge in prices was transitory.

The bank decided to make its biggest interest rate hike since 2000 in a bid to limit the current inflation rate. It hiked rates by 0.50% and then committed to hike in the upcoming meetings. 

Since then, the bank’s officials have sounded more hawkish. For example, in a statement on Tuesday, Loretta Meister said that she will support more 50 basis points rate hikes in the upcoming meetings. She also reiterated that a 0.75% rate hike was also possible. Other officials like Raphael Bostic and Jay Powell have been hawkish as well.

Therefore, the upcoming US consumer inflation data will be a catalyst for the dollar index. Economists expect the numbers to show that inflation declined slightly in April. Precisely, they expect that the headline CPI dropped from 8.5% in March to 8.0% in April. They also believe that the core CPI dropped from 6.5% to 6.0% in the same period.

Better-than-expected inflation numbers will provide the Fed with an incentive to hike interest rates more aggressively. On the other hand, if analysts are accurate, it will signal that inflation is peaking. As such, it will reduce the incentive for the bank to keep hiking.

The DXY index has been in a strong bullish trend in the past few months. As a result, the currency moved to the highest level since 2002. A closer look at the four-hour chart shows that the currency has moved below the ascending trendline that is shown in green. It has also moved between the 25-day and 50-day moving averages.

Therefore, there are signs that the dollar index may have peaked. If this happens, the next key support level to watch will be at $102.37, which was the lowest level on May 5th.

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