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

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Nov 5, 2020
  • The US dollar index (DXY) is falling today ahead of Fed rate decision.
  • The bank is expected to leave interest rates unchanged and pledge to do more.
  • The decision comes a day before the October nonfarm payroll numbers.

The US dollar index (DXY) is tilting higher as traders remain laser-focused on the US election and the potential for a gridlock in Washington. The index is also eying today’s Fed interest rate decision ahead of tomorrow’s nonfarm payroll numbers.

Dollar index
US dollar index falls ahead of Fed

Fed interest rate decision eyed

The Federal Open Market Committee (FOMC) started its meeting yesterday as most market participants were focused about the election. The committee, which is led by Jerome Powell, will deliver its decision at 15:30 GMT.

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The meeting comes at a time when the country is headed to a gridlock. This is because Democrats will continue to control the House of Representative while Republicans will control the senate. That means that Joe Biden, who is likely to win the White House, will have smaller chances of passing his ambitious plans. In a statement, Kir Juckes, an analyst at Societe Generale said:

“Markets wait for clarity, but I still believe the Fed matters more for the dollar than who lives in the White House.”

Analysts polled by Reuters and Bloomberg expect that the bank will leave rates at 0.25%. With gridlock and signs that the economic growth is easing, they believe that the Fed will also continue its quantitative easing policies. Also, they expect the bank to press Washington for more stimulus to stimulate the economy. In a note, Julian Emmanuel of BTIG said:

“Powell himself has made very clear that the most important thing is getting cash into people’s hands. I think he has to [comment], and I think it may be a market negative.”

The meeting also comes at a time when the American economy is facing its biggest challenges with the number of Covid-19 cases rising. Also, recent economic number have signalled that growth is easing. For example, data from ADP showed that the nonfarm employment change in October declined to 365k from 749k in September. In the same month, the ISM non-manufacturing PMI dropped from 57.8 to 56.6.

Most importantly, the Fed rate decision comes a day before the October nonfarm payroll numbers. The median estimate is that the unemployment rate will drop from 7.9% to 7.7%, with economy adding 600k jobs. Also, analysts believe that the average hourly earnings will fall from 4.7% to 4.6%.

US dollar index technical analysis

US dollar index
US dollar index technical chart

The dollar index is trading at $93.38, which is below yesterday’s high of $94.30. The price has also moved below the 28-day and 14-day exponential moving averages. It is also between the first and second supports of the Andrews pitchfork while the Average True Range (ATR) has risen in signs of higher volatility. A move below $93, the lower side of the pitchfork, will mean that bears have prevailed, which will push the index substantially lower.

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