US dollar index (DXY) forecast ahead of retail sales and inflation data

The US dollar index has retreated sharply in the past few days as investors focus on the upcoming US inflation and retail sales data. It has fallen in the past five straight days and moved to the lowest level since August 19. 

US inflation and retail sales data ahead

The DXY index has pulled back as the market volatility eased ahead of the important inflation data scheduled for Tuesday. Economists believe that inflation in the US dropped for the second straight month in August. Early signs are that prices of key contributors to inflation like gasoline and used cars prices have all dropped.

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Economists polled by Reuters expect that US inflation dropped from 8.5% in July to 8.1% in August. On a month-on-month basis, analysts believe that inflation dropped by 0.1%. 

On the other hand, excluding the volatile food and energy prices, analysts believe that the country’s inflation rose slightly. Precisely, they expect that inflation rose to 5.1% in August.

The Bureau of Labor Statistics (BLS) will also publish the latest producer price index (PPI) data on Thursday. Economists polled by Reuters expect the data to show that the headline PPI rose dropped by -0.1% in August. They see it falling from 9.8% to 8.8% on a year-on-year basis.

The US dollar index has fallen as investors price in what the Federal Reserve will do in the coming months. With inflation showing signs of falling, there is a likelihood that the bank will slow its rate hikes in the coming months. 

Fed officials like Jerome Powell and Lael Brainard have insisted that the bank will continue hiking interest rates for a while.

The DXY index will next react to the upcoming retail sales data scheduled for Thursday. With inflation falling and consumer confidence rising, there is a likelihood that retail sales continued doing well.

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bearish trend in the past few days. Still, the stock has moved between the 25-day and 50-day moving averages. It has also remained above the ascending trendline shown in black while the MACD has formed a bearish divergence pattern.

Therefore, there is a likelihood that the index will resume the bullish trend as buyers target the key resistance level at $110. A move below the ascending trendline will signal that sellers have prevailed.