DXY: US dollar index to rally by 1% to $92.90 – ING

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 Jun 18, 2021
  • The US dollar index has been in a strong bullish trend recently.
  • The rally is attributed to the hawkish Fed decision.
  • The index will likely keep rising according to analysts at ING.

The US dollar index (DXY) strength accelerated on Friday as traders remained optimistic about the country after the hawkish Fed decision. The index is trading at $91.90, which is the highest it has been since April. It is also 2.5% above the lowest level this year.

Fed decision

The biggest driver for the dollar index this week has been the Fed interest rate decision. The bank decided to leave interest rates unchanged at between 0% and 0.25% where they have been in the past few months. The bank also decided to continue with its $120 billion asset purchase program, which has pushed its total assets to almost $8 trillion.

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The DXY surged because of the hawkish tone that the Fed used during the meeting. In the statement, the Fed said that the US economy was recovering at a faster pace than expected. As a result, it expects that interest rates will start to rise in 2023. Some members also pointed to the first hike in 2022. As such, some investors have started pricing-in tapering of the asset purchases. 

The decision came at a time when the US economy is doing relatively well. Inflation has surged to 5% while core consumer prices have risen to more than 4%. At the same time, the unemployment rate has dropped to a post-pandemic low of 5.8%. House prices have risen while industrial and manufacturing production has surged.

As such, the dollar index has risen because the hawkish Fed has outweighed other central banks. Last week, in its interest rate decision, the ECB said that it will maintain its policy for a while. The Bank of Canada has also started tapering its asset purchases. 

In a note today, analysts at ING said that they expect the DXY will keep rising in the near term. They wrote:

“Given that DXY is heavily weighted towards European low-yielders, the near-term bull trend may have further to run – initially to the 92.90 technical area – that’s about 1% higher than current levels.”

Dollar index technical forecast

US dollar index
US dollar index chart

The daily chart shows that the dollar index has been in a relatively bullish trend lately. Along the way, it has moved above the 25-day moving average and the Ichimoku cloud. The two lines and the histogram of the MACD have also moved above the neutral line. Further, it has moved above the upper side of the ascending channel pattern. Therefore, the index will likely keep rising as bulls target the next key resistance at $93.

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