DXY: US dollar index forms head and shoulders ahead of FOMC decision

Written by: Crispus Nyaga
January 25, 2021
  • The US dollar index has formed a head and shoulders pattern ahead of the FOMC interest rate decision.
  • Economists expect the bank to leave interest rates and quantitative easing policies unchanged.
  • The US will also release its Q4 GDP data on Thursday this week.

The US dollar index (DXY) is up for the second straight day ahead of a relatively busy week for the American markets. The index is trading at $90.30, which is slightly above this week’s low of $89.17.

Dollar index
Dollar index price action

Federal Reserve interest rate decision

The dollar index is rising ahead of the Fed interest rate decision scheduled for Wednesday this week. Central Bank watchers expect that the bank will leave interest rates unchanged at the current record low of between 0% and 0.25% in this meeting. Also, the bank is expected to continue with its asset purchases as it tries to support the economy.

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Still, investors in forex will pay close attention to the dot plot and the statement by Jerome Powell. The dot plot is a figure that shows where the FOMC members expect the rates to be in the future. This plot will be important since some of the policy members have already started to talk about tapering asset purchases and hiking interest rates. 

The FOMC meeting will come at a time when there are doubts about Joe Biden’s $1.9 trillion stimulus package. While most senators believe that the stimulus is needed, some of them have questioned parts of the package. For example, some have questioned whether all Americans should receive the $1,400 check. 

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US GDP numbers ahead

The dollar index is also rising ahead of the first reading of the US Q4 GDP numbers that will come out on Thursday. These numbers will provide more colour about the US economy and the ongoing recovery. 

Economists polled by Reuters expect the data to show that the economy expanded by 4% after rising by more than 33.4% in the previous month. This growth will mostly be because of increased consumer spending during the holiday season. 

On Friday, the dollar index will react to the personal income and spending numbers. Other vital data that will come out this week are new home sales, wholesale inventories, and durable goods orders.

Dollar index technical outlook

Dollar index
US dollar index technical chart

The four-hour chart shows that the dollar index found strong support at $90 and has been attempting to rise. The index has also formed a head and shoulders pattern whose neckline is at $90. It is also slightly above the 25-day exponential moving average. Therefore, in the near term, the index will likely continue rising as bulls target the right shoulder at $90.60. If this plays out, the index will likely pull back and drop below the YTD low at $89.22.