US dollar index (DXY) to fall further after dovish Fed statement – Wells Fargo

US dollar index (DXY) to fall further after dovish Fed statement – Wells Fargo
  • The US dollar index (DXY) is set to decline further after the Fed delivered a dovish statement yesterday.
  • The bank left interest rates unchanged and warned of the rising risks posed by coronavirus.
  • Focus shifts to the preliminary US second-quarter GDP data.

The US dollar index (DXY) rose slightly after the relatively dovish interest rate decision by the Federal Reserve. The index, which tracks the dollar’s performance against key peers, is up by about 0.10% in early Thursday trading. The EUR/USD is down by 0.20% in the Asian session.

US dollar index
US dollar index is at the lowest it has been since 2018

Fed interest rate decision

The Federal Reserve struck a cautious view yesterday when it delivered its July interest rate decision. The bank left interest rate unchanged between 0% and 0.25%, as most analysts were expecting. It expects thee rates to remain at the current level “until it is confident that the economy has weathered recent events.” The bank also left the open-ended quantitative easing program unchanged.

At the same time, the Fed warned that the ongoing wave of the virus was a major risk for the American economy. The Fed was referring to the fact that the country has reported more than 4.5 million cases and more than 150,000 deaths. Yesterday alone, the US confirmed more than 54,000 new infections.

To cushion the economy, the Fed said that it was ready to do more. For example, it decided to extend the swap lines with other key central banks open in its bid to ensure that dollars remained in plenty where they were needed. In the press conference, Jerome Powell said:

“We want them to remain in place and be available as long as they are needed and, since the crisis and the economic fallout from the pandemic are far from over, we’re going.”

The meeting came at a time when the US dollar has been under pressure. This week, the US dollar index dropped to its lowest level in two years as currencies like the euro, Swedish krona, and Norwegian krone have reigned supreme. And some analysts believe that the weakness will persist.

In an interview with CNBC after the rate decision, Michael Schumacher, a Wells Fargo analyst said that the currency will weaken further. He said:

“The dollar could conceivably get a little bit of a bounce. But if you look for, let’s say, a trade for the next four to five months, we think it’s dollar weakness.” 

US GDP data ahead

With the Fed decision behind us, the US dollar index will now react to the preliminary second-quarter GDP data from the US. Analysts believe that the data will show that the US had the worst performance ever in the quarter.

Analysts polled by Reuters see the economy falling by about 34.7%. That decline will mostly be because of a sharp fall in consumer spending as more people stayed at home.

However, while the number is an important one, analysts caution that is backward-looking. Even with the rising number of coronavirus cases, analysts see a rebound in the third quarter. A recent Moody’s poll found that analysts see the economy rebounding by 16.4% in the third quarter.

In addition to the GDP, analysts will be watching the US jobless claims numbers. The median estimate is that more than 1.45 million Americans filed for jobless benefits, up from the previous 1.41 million.

US dollar index analysis

US dollar index
US dollar index technical forecast

The weekly chart shows that the US dollar index is trading at the lowest level since July 2018. The price is below the 50-day and 100-day exponential moving averages. The RSI has moved to the lowest level since February 2018. Also, the price is slightly below the 38.2% Fibonacci retracement level. Therefore, I expect the price will continue falling as bears target the next support at $92.

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