DXY: US dollar index chokes ahead of the Fed interest rate decision

The US dollar index (DXY) declined by more than 0.30 per cent ahead of the Fed interest rate decision. It is trading at $96.35, which is significantly lower than last week’s high of $97.06.

Fed interest rate decision preview

The US dollar and US stocks declined ahead of the Federal Open Market Commission (FOMC) interest rate decision. The Dow Jones Industrial Average and the S&P 500 have dropped by more than 1%.

The FOMC meeting comes at a time when most analysts are adjusting their prospects of the US economy. According to Bloomberg, most prominent analysts expect the economy to have a V-shaped recovery.

That is mostly because of the recent jobs data. On Friday, data from the Labour Department showed that the US created more than 2.5 million jobs in May while the unemployment rate dropped to about 13.3%. Analysts were expecting the economy to lose more than 8 million jobs and the unemployment rate to jump to almost 20%.

The health of the labour market was also revealed today when the bureau released the Job Openings and Labour Turnover Survey (JOLTS) data. According to the bureau, the number of job openings on the last business day of April were more than 5.04 million. Analysts were expecting the data to be less than 5 million.

Still, a look at Friday’s jobs report shows that the economy is still suffering. For one, most of the jobs that were created were merely furloughed employees who came back to the labour force.

There have been other positive data from the US. For example, auto sales rebounded in April, according to Autodata. Another data showed that fewer Americans are asking for mortgage help. According to the Mortgage Bankers Association (MBA), the number of forbearances increased slightly to 8.53% from the previous 8.46%.

What will the Fed do?

The Fed meeting comes at a time when the US dollar index has been in a downward trend. It has lost almost 3% of its value in the past 30 days.

Analysts believe that the Fed will leave interest rates unchanged at the current rate of between 0.0% and 0.25%. They also expect that the bank will take a more cautious tone regarding the economic outlook.

They will be cautious for two reasons. First, any sign of hawkishness will roil the market at a time when US stocks are gaining. Second, even with last week’s positive jobs data, the economy has 19.6 million fewer jobs than it had in February. Third, there are signs that the number of coronavirus cases is increasing in states that reopened early like Florida.

Finally, the Fed will have a cautious tone because the economy will take a longer period to recover. For example, analysts expect the GDP to decline by 40% and more industries like hotels to take longer to recover.

In addition to interest rates, the Fed will likely leave the open-ended quantitative easing program in place. While the Fed has tapered the purchases recently, they will likely commit to more purchases.

Further, according to WSJ, the Fed may unveil a new monetary policy tool. The paper’s sources said that the bank is considering capping treasury yields if they believe that rates will remain at the current lows for long. The new strategy will mirror that of Bank of Japan, which pledged to keep Japanese Government Bonds (JGBs) at zero. It achieved this by committing to buy those securities at whatever price is needed.

US dollar index technical outlook

On the daily chart, the US dollar index has been on a downward trend since March 20 when it was trading at 102.99. The index has moved below the 23.6% Fibonacci retracement level and is also below the 50-day and 100-day exponential moving average. Also, the RSI has moved to the oversold level at 26. Therefore, I expect the index to continue falling as bears attempt to test the psychological level of $95.0.