The US dollar index (DXY) is in an upward trend after it crashed on Friday due to the weak consumer confidence data. The index rose from last week’s low at $92.47 to a high of $$92.70.
Tapering talk intensifies
The US dollar index has bounced back after the rising optimism that the Federal Reserve will start tapering its asset purchases soon.
Several Fed officials hinted that the bank would start deliberations on winding down of quantitative easing policy in the coming meetings.
In an interview with the Financial Times, Mary Daly of San Francisco said that the bank could start calling back its purchases by the end of the year. She added that this would happen if the economy maintains its current strength.
In an interview with CNBC, Eric Rosengren of the Boston Fed said that he would be supportive of the bank rolling back some of its purchases this fall. Other Fed officials like Raphael Bostic and Richard Clarida have also sounded relatively hawkish in the past few months.
Therefore, the US dollar index will react to a statement by Jerome Powell, the Federal Reserve chair. He will hold a town hall meeting with educators and students. In it, he will likely talk about the impact of the Fed’s policies on the American economy and when he expects the tapering to start.
Still, the Fed has time to assess the impact of the current wave of the pandemic. Besides, it will hold its next meeting on September 22.
The next key catalyst for the US dollar index will be the Federal Open Market Committee (FOMC) minutes of the last meeting that will come out on Wednesday.
In this meeting, the bank decided to leave interest rates and quantitative easing policies unchanged. Therefore, the minutes will provide more color about the deliberations that went on during the meeting.
US economic data
The recent price action of the US dollar index is mostly due to the recent US economic data.
Last week, data published by Michigan University showed that the country’s consumer confidence slipped to the lowest level since 2011. This is an important number since it tends to highlight the state of consumer spending.
Further data showed that while consumer inflation remained elevated in July, there were signs of easing. At the same time, the labor market remained tight, with the unemployment rate sliding closer to 5%. The American economy is said to be in full employment when the unemployment rate drops below 5.0%.
This week, the DXY will react to the latest US retail sales, housing, and manufacturing production data. On Tuesday, the numbers are expected to show that the economy’s sales retreated slightly in July. Precisely, they see the headline retail sales number falling by 0.2%.
On Wednesday, the US will publish the latest building permits and housing starts numbers. Analysts expect the numbers to reveal that permits rose from 1.59 million to more than 1.610 million. Housing starts are expected to have dropped from 1.643 million to more than 1.640 million.
US dollar index forecast
The three-hour chart shows that the US dollar index has formed a classic bullish pattern – the cup and handle. It has already completed the cup section of the pattern. Also, it is currently forming the handle section.
Along the way, it has moved above the 25-day and 50-day Exponential Moving Averages (EMA). Therefore, the index will likely keep rising as bulls target the upper side of the cup at $93.18.
