The US dollar index (DXY) continued its strong rally as investors embraced a risk-off sentiment after Donald Trump won the US election. The DXY index, which weighs the greenback against a basket of currencies, rose to $106.7 also ahead of the upcoming US consumer price inflation data. It has jumped by 5.8% from its lowest level this year.
DXY index rises amid a risk off sentiment continues
The US dollar index continued its bull run as investors embraced a risk-off sentiment after Trump’s win. This rally happened as the currency rallied against all currencies in the index.
The euro plunged to 1.0600, its lowest level since April 22, while the British pound fell to 1.2750, which was much lower than the year-to-date high of 1.3422. Similarly, the greenback slumped against currencies like the Japanese yen, Swiss franc, and Swedish krona.
This crash is mostly because of what Trump promised during the campaign period and the implications. For example, Trump pledged to have the biggest deportation force on record, and has appointed senior officials who are committed to that.
If the strategy works out, it will be an inflationary event since many undocumented immigrants work in key sectors like agriculture and construction. If these workers are all gone, it means that there will be a labor shortage, leading to higher prices.
Trump also pledged to impose large tariffs on imports, especially from China. Such a move will have major implications since those tariffs will be passed to American consumers, leading to higher inflation.
At the same time, foreign countries will respond by imposing tariffs on American goods. China will likely put more barriers on US crops and even Boeing, one of the top sellers to the country.
Meanwhile, Trump has sought to influence the Federal Reserve, a move that will be difficult since a president can only fire officials for cause. Also, the US has an established system of checks and balances that will prevent Trump from doing some things.
US inflation data ahead
The next important US dollar index news will be the upcoming consumer inflation data on Thursday. Economists expect these numbers to reveal that prices remained steady in October, with the headline CPI rising to 2.6%.
The core CPI, which excludes the volatile food and energy prices, remained unchanged at 3.3%. If these numbers are accurate, then it means that the Federal Reserve may opt to maintain interest rates unchanged in the last meeting of the year.
These numbers will come a week after the Federal Reserve slashed interest rates by 0.25% and hinted that more were coming. Other global central banks like the European Central Bank and the Bank of England are also cutting rates.
The US inflation data will have a limited impact on the US dollar index because the Fed is now focusing on the labor market. Data showed that the economy created just 12,000 in October, while the unemployment rate rose to 4.1%.
US dollar index technical analysis
The daily chart shows that the US dollar index has been in a strong bull run after bottoming at $100.12 on September 26. It has formed a golden cross pattern as the 200-day and 50-day Weighted Moving Averages (WMA) cross each other.
The Relative Strength Index (RSI) and the Stochastic Oscillator have all continued soaring, meaning that it has a bullish sentiment. It has also jumped above the 38.2% Fibonacci Retracement level.
Therefore, the DXY index will likely continue soaring as bulls target the 50% retracement at $107.15. This view will become invalid if the index drops below the key support level at $105.
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