DXY: US dollar index forecast ahead of the FOMC decision

The US dollar index (DXY) is tilting higher as the market waits for the latest FOMC interest rate decision that will come out in the American session. It is trading at $91, which is 0.40% above the lowest level this month.

FOMC decision ahead

The Federal Open Market Commission (FOMC) of the Federal Reserve will conclude its two-day monetary policy meeting today. 

This decision comes at an important time for the American economy. Corporate earnings are surging as evidenced by the recent earnings by companies like Alphabet and Microsoft. Indeed, the Dow Jones, S&P 500, and Nasdaq 100 index are all at their all-time highs. 

Economic numbers have also been strong, helped by the massive stimulus offered by the government and the Fed. Early this month, data revealed that the unemployment rate declined to 6.0% in March. This was a remarkable decline considering that it was at 14.8% last year. 

Further data showed that consumer inflation rose by 2.6% in March because of high prices. This figure was above the Fed’s target of 2.0%. In addition, manufacturing and services activity has soared. And on Tuesday, data by the Conference Board showed that consumer confidence has soared in April. Most importantly, the number of coronavirus cases has declined, helped by the massive vaccination drive.

It is against this backdrop that the Fed will make its interest rate decision. Economists expect that it will leave interest rates and quantitative easing unchanged. They expect the bank to signal potential tightening in the fourth quarter.  In a note to Bloomberg, an analyst at Amherst said that the bank will continue being dovish for a while. He said:

“Until we get to that point, they are going to continue to say the economy is getting better but we need to see more evidence. We are not out of the woods yet.”

In another note, an analyst at JP Morgan said:

“They want to see gains across all sorts of demographics, including wage pressures that come with full employment. There are still big pockets of weakness in the labor market. There is still a long way to go, with 8 million jobs lower than before the pandemic.”

The dollar index has risen against most constituent currencies. It has gained by 0.25% against the yen and sterling, 0.15% against the euro and Swiss franc, and by 0.10% against the Swiss franc.

US dollar index forecast

The four-hour chart shows that the dollar index has been on a slow upward trend in the past few days. Still, it is 2.60% below the highest level this year. The index has also moved slightly below the 61.8% Fibonacci retracement level. The downward is also being supported by the 50-day moving average. Therefore, in my view, the dollar index will likely have a bearish breakout as bears target moves below the April low of 90.68.