DXY: Is the US dollar index a buy or sell in May?

The US dollar index (DXY) retreated after surging by almost 1% on Friday. It declined by more than 0.25% to $91.10, which is slightly below this last week’s high of $91.40. So, is the DXY a buy or sell in May?

Dollar index price action

US economy firing on all cylinders

In April, data from the United States showed that the economy is firing on all cylinders. According to the Conference Board, consumer confidence surged in April as Americans cheered the vaccination trend. 

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Earlier in April, data revealed that the US economy added almost a million new jobs in March while the unemployment rate declined to 6.0%. Further data showed that the composite PMI rose close to an all-time high, signaling that output was improving. 

Meanwhile, the closely watched retail sales and inflation numbers were also positive. The headline consumer price index (CPI) rose to 2.6% while retail sales rose by almost 10% in March. And on Friday, data by the statistics bureau showed that the economy expanded by more than 6% in the first quarter.

So, why did the US dollar index decline in April? Analysts cite the relatively dovish Federal Reserve, which decided to leave interest rates unchanged. In a statement, Jerome Powell insisted that the bank was not worried about inflation or the overheating of the economy. He also said that the recent numbers were transitionary.

Looking ahead, in May, the DXY will react to several things. This week, the index will move in reaction to the latest non-farm payrolls (NFP) data from the United States. Economists polled by Reuters expect the data to show that the unemployment rate fell from 6.0% in April to 5.7% in June. They also believe that the economy added almost 1 million jobs. 

Since the Fed will not meet this month, the market will focus on economic data and Biden’s policies. In addition to the jobs numbers, other important numbers will be inflation and retail sales. The Biden policies to watch will be on infrastructure.

US dollar index forecast

Dollar index
Dollar index technical chart

The daily chart shows that the dollar index started to struggle when it rose to $93.40 in March. As it dropped, the pair moved below the descending red trendline that connects the highest levels in September, November, and March 9. It has also formed a head and shoulders pattern that is usually a bearish signal. Most importantly, the 25-day and 50-day weighted moving averages (WMA) have made a bearish crossover. Therefore, the index will likely keep falling as bears target the next key support at $89.70.

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