US dollar index (DXY) break and retest points to a rebound

The US dollar index (DXY) continued its downward trend on Friday after a slew of mixed economic data from the United States. The index declined to $101.60, which was the lowest level since April 25th this year. It has fallen by more than 3% from its highest level this year.

Mixed US economic data

Data published this week presented a mixed picture about the American economy. On Friday, data showed that US inflation declined slightly in April even as consumer spending jumped. 

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According to the Commerce Department, consumer spending rose by 0.9% in April. This spending increased as the savings rate declined to 4.4%, the lowest level in almost 15 years. As such, this is a sign that many Americans are tapping their savings to offset the rising costs.

At the same time, inflation as measured by personal-consumption expenditure (PCE) declined from 6.6% in March this year to 6.3%. This rate is still near its highest level since 1982. But the small decline is a movement in the right direction.

Meanwhile, the housing sector is showing some strains. On Thursday, data revealed that pending home sales declined by a whopping 3.9% in April after falling by another 1.6% in March. The data came two days after the US showed that the country’s new home sales numbers crashed by more than 16%.

There are two main factors affecting the housing sector. First, there is an ongoing supply shortage due to the pandemic and the rising cost of building. Second, mortgage rates are rising, which is slowing demand as people wait for the prices to rebalance. 

At the same time, the US dollar index is reacting to the persistent hawkish tone by the Federal Reserve. Minutes published this week showed that officials expect to hike interest rates in all the remaining meetings of this year.

US dollar index forecast

The daily chart shows that the DXY index has been in a spectacular sell-off this week. It is now trading at $01.6, which is along the upper side of the ascending trendline. The price is also between the 25-day and 50-day moving averages while the Relative Strength Index has pulled back 

Therefore, while the chart seems bearish, there is a likelihood that it will resume the bullish trend since it has formed a break and retest pattern. If this happens, a retest of its YTD high at $105 can’t be ruled out.