DXY: US dollar index outlook ahead of Fed interest rate decision

The US dollar index (DXY) pared back some of the losses experienced in the past few days as investors refocused on the Fed monetary policy meeting and US stimulus. The index is trading at $93.75, which is slightly higher than yesterday’s low of $93.50.

The US dollar has gained against most currencies in the index. It is up by 0.45% against the Swedish krona, 0.40% against the sterling, and 0.10% against the euro (EUR/USD). On the other hand, the currency is down by 0.42% and 0.30% against the Swiss franc and Japanese yen, respectively.

Fed starts its meeting

A key driver for the US dollar index today is the Federal Reserve meeting that is starting today. In it, the members will deliberate on the state of the US economy and unveil their rate decision tomorrow.

The meeting comes at a difficult time for the US economy and the dollar. The number of covid-19 cases is rising and many states have scaled-back their reopening plans. As a result, the number of Americans filing for unemployment benefits has risen. And, more analysts have ruled out the possibility of a V-shaped recovery.

As such, analysts believe that the Fed’s statement will be relatively dovish tomorrow. All analysts polled by Reuters expect that the Fed will leave its main lending rate unchanged. With the economy contracting, they also see the bank hinting at what will happen in the near term.

According to the Wall Street Journal, the Fed has several tools at its disposal. For one, it can implement the so-called yield curve control programs like the Bank of Japan and Reserve Bank of Australia. In this program, the bank would set a target for government bonds and buy as much bonds as possible. The WSJ warned about this strategy, writing:

“Without meaning to be rude, the world cares little about the yield on a 10-year Japanese or three-year Australian bond. Everyone must care about the interest rate on 10-year U.S. Treasury notes.”

US dollar reacts to US stimulus

The US dollar index is also reacting to stimulus from Washington. In a statement yesterday, senate majority leader, Mitch McConnel, introduced a $1 trillion spending package that differed with the one introduced by Democrats.

First, his bill will reduce the amount of money unemployed Americans receive from $600 to $200. The goal is to incentivise more unemployed people to find work. Furthermore, many people earn more in unemployment insurance than in their workplace.

Second, the bill has a clause that shields businesses from coronavirus-related liabilities. Third, while the bill has a $1,200 payout, it differs with the Democrats’ bill by how it is implemented.

In the coming days, the US dollar index will react to how the two sides will deliberate on this issue. Meanwhile, data from Conference Board showed that consumer confidence in the US declined from 98.3 to 92.6 in July.

US dollar index technical outlook

The daily chart below shows that the US dollar index has been in a sharp decline in the past few weeks. It has been in the red in the past seven consecutive days. Consequently, the price is below the 50-day and 100-day exponential moving averages while the RSI has dropped to the lowest level since March 9. Therefore, even with today’s bounce, the dollar remains under pressure, which means that it is likely to continue falling.