Fed decision and US GDP preview – Implications for the dollar index (DXY)

Written by: Crispus Nyaga
January 27, 2021
  • The US dollar index (DXY) has bounced back today ahead of Fed interest rate decision.
  • The bank is set to leave interest rates and quantitative easing policies unchanged
  • The US will publish its Q4 GDP data tomorrow.

The US dollar index (DXY) is rising today ahead of key events from the United States, including the FOMC decision. It is trading at $90.58, which is 0.45% above yesterday’s close.

US dollar index
US dollar index

FOMC decision next

The Federal Open Market Committee (FOMC) will conclude its two-day meeting later today. This will be followed by the release of the interest rate and a press conference by Jerome Powell. 

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Judging by the past FOMC decision and the recent statements by Fed members, there will be no policy changes today. Instead, forex investors will focus on the language of the policy statement and the speech by Powell. Notably, they will look at the dot plot for signs of when the bank will start raising rates or tapering its asset purchases.

Further, analysts will look out to the Fed’s GDP and inflation target as the rising number of coronavirus cases converge with the vaccine rollout. Therefore, the dollar index will likely continue rising in case of a hawkish Fed and vice versa.

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Important economic data ahead

The dollar index is also rising as bulls react to the mixed durable goods numbers from the United States. According to the US statistics bureau, durable goods orders rose by 0.2% in December after rising by 1.2% in November. This reading was lower than the median estimate of 0.9%. 

In the same period, the core durable goods orders rose by 0.7%, which was better than the expected 0.5%. These numbers mean that congress will be more inclined to pass another ambitious stimulus package. 

Tomorrow, the DXY will react to the first Q4 GDP estimate from the United States. Economists believe that the US economy expanded by just 4% in the fourth quarter after rising by more than 33% in the previous month. Also, the index will react to the latest jobless claims numbers.

Finally, on Friday, the US dollar index will react to the US personal spending and personal income numbers. 

US dollar index forecast

dollar index
Dollar index technical chart

On the 2-hour chart, we see that the DXY found a strong support at the $90.05 level this week. It has also moved above the 25-day and 15-day weighted moving averages while the Average Directional Movement Index (ADX) has started to rise. 

Therefore, in case of a hawkish Fed, the index will likely attempt to retest the important resistance at $90.93. However, as I warned yesterday, the dollar index has also formed a head and shoulders pattern that is usually bearish.