FOMC preview: Dollar index under pressure ahead of Fed decision

on Sep 15, 2020
  • The US dollar index is under pressure as the market waits for the Fed interest rate decision.
  • The index has fallen for the past three consecutive days and is trading at the lowest level since Friday.
  • Analysts polled by CNBC expect the bank will leave rates unchanged until 2023.

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The US dollar index (DXY) is in its third straight day in the red as traders wait for the Federal Reserve interest rate decision. The index is trading at $92.83, which is the lowest it has been since Friday last week.

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Dollar index
Dollar index falls ahead of FOMC

Dollar falls ahead of the FOMC

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The dollar index is falling today as the greenback weakens against all constituent currencies. It is down by 0.55% against the British pound, 0.25% against the euro and Swiss franc, and by 0.20% against the Japanese yen.

The decline happens as the Federal Open Market Committee (FOMC) kicks-off its two-day meeting. Ahead of the meeting, a survey of economists by CNBC found that most of them believe that the bank will leave rates unchanged until 2023. They expect the bank to wait for about 6 months after the inflation rate jumps above 2%.

Analysts also expect that the bank will leave its open-ended quantitative easing policy intact in this week’s policy meeting. This policy has seen the Fed’s balance sheet rise from slightly below $4 trillion in March this year to more than $7 trillion.

This meeting comes two weeks after the Fed chair delivered a relatively dovish statement at the virtual Jackson Hole summit. In his speech, he said that the bank will tolerate higher inflation rates as it tries to lower the unemployment rate. This means that the bank will not be under pressure to intervene once inflation crosses its target of 2%.

Last week, data from the US showed that the headline consumer price index rose by 0.4% in August. That pushed the annualised rate to 1.3%. The core CPI, which exclude the volatile food and energy, rose by 0.4% after rising by 0.6% in the previous month. A day before, data showed that the producer price index rose by 0.3% in August.

The FOMC meeting comes at a time when the US economic data has been relatively stable. Earlier this month, data from ISM and Markit showed that the manufacturing and services PMIs remained above 50 in August. Another data from the Bureau of Labour Statistics showed that the US added more than 1.3 million jobs as the unemployment rate fell to 8.4%. As a result, analysts have started to revise their full year guidance. Analysts expect the GDP to contract by 2.6% this year, up from the previous 4.6%.

US dollar index technical outlook

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US dollar index
US dollar index technical chart

The daily chart shows that the dollar index’s attempts to rebound found strong resistance at the $93.63 level on 9th September. Since then, the index has been in a downward trend and is now trading at $92.82. The price is still below the 50-day and 25-day weighted moving averages. Similarly, the Average Directional Index (ADX) has dropped to the lowest level since July 9.

Therefore, it seems like bears have prevailed, which means that it is a matter of time before the index retests the year-to-date low of $91.73.

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