DXY: Dollar index on the cusp of a bearish breakout below $90 after dovish Fed

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 Dec 17, 2020
  • The US dollar index continued its tragic decline after the Fed interest rate decision.
  • It left interest rate unchanged and pledged to continue its bond purchases.
  • The bank also upgraded its economic forecast for 2020 to a contraction of 2.4%.

The US dollar index (DXY) declined overnight as forex investors reacted to the final interest rate decision by the Federal Reserve. The index is hovering near the psychological level of $90, where it has been in the past few weeks. 

US dollar index under pressure

Fed decision 

In its final interest rate decision of the year, the Federal Reserve voted unanimously to leave its pandemic response tools intact. 

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It left the short-term interest rates unchanged at the range of 0.0% and 0.25%, in line with what analysts were expecting. 

The bank also left the giant quantitative easing program unchanged, meaning it will continue buying at least $120 billion worth of bonds per month. Notably, the bank did not mention the duration of these purchases, as most analysts were expecting. 

In its forecast, the bank boosted the 2020 outlook even as the economy continues to battle the rising coronavirus cases. It now sees the economy falling by 2.4% this year, better than the September estimate of a 3.7% decline. Further, the bank sees the economy rising by 4.2% in 2021, higher than the previous estimate of 3.2%. 

Fed guidance

In a note after the decision analysts at ING wrote that:

“As long as the Fed doesn’t touch the short end – or provide any hints of tapping the brakes (tapering) – we expect the reflation trade to dominate in 2021 and the dollar to fall 5-10% across the board.”

In response to the rate decision, the dollar declined by 0.15% against the euro, 0.20% against the pound, and by 0.15% against the Japanese yen. 

Later today the index will react to the final interest rate decisions by the Swiss National Bank (SNB) and the Bank of England (BOE). The two banks are expected to leave their policies intact and highlight their plans for the coming year. 

US dollar index technical analysis 

Dollar index technical chart

The US dollar index is about to move below the important support at $90.00 helped by a dovish Federal Reserve. On the four-hour chart, the index has managed to move below the important resistance at 91.20. It is also below the important short and longer-term moving averages and is on the same level as the lower side of the Donchian channels. 

Therefore, we believe that the dollar weakness will continue this month. You can take advantage of this by shorting the currency using one of the best high leverage forex brokers. However, we also suspect that the index, which is getting oversold will bounce back in the coming year.

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