DXY: is the US dollar index a buy ahead of Powell testimony?

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on Jun 22, 2021
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  • The US dollar index retreated on Monday as investors readjusted to the Fed decision.
  • The Central Bank left interest rates and quantitative easing policies unchanged.
  • The DXY will later react to Jerome Powell’s Congressional testimony.

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The US dollar index (DXY) retreated after staging a major comeback last week after the hawkish Fed interest rate decision. The index fell from last week’s high of $92.40 to $91.35. 

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US dollar retreats

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The US dollar index rallied sharply last week after the Federal Reserve delivered a relatively hawkish decision. In it, the bank decided to leave interest rates and quantitative easing policies unchanged. Rates remained at the range of 0.0% and 0.25% while the total amount of monthly asset purchases remained at $120 billion. 

The main change was in the Fed’s dot plot, which showed that many policymakers expect interest rates to start rising in 2023. This will be earlier than the previous estimate of 2024. As such, analysts now believe that the Fed will start tapering its asset purchases later this year.

The dollar index will today react to Jerome Powell’s testimony in Congress. This testimony will be about the bank’s response to the pandemic and what it expects to do. In prepared remarks, the chair said that the American economy will continue doing well while inflation will start retreating. He said:

“Job gains should pick up in coming months as vaccinations rise, easing some of the pandemic-related factors currently weighing them down.”

Still, New York Fed’s John Williams believes that the Fed should maintain its policies for longer. He said that an easy money monetary policy was needed even as the economy continued to recover.

The index will also react to the latest existing-home sales numbers from the country. Analysts expect the numbers to show that existing sales fell from 5.85 million to 5.72 million in May. Still, the overall housing sector in the US remains stable, helped by the relatively lower interest rates. Later this week, the dollar index will react to the latest GDP and durable goods data and the Bank of England decision.

US dollar index technical analysis

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US dollar index
US dollar index chart

The four-hour chart shows that the dollar index has rebounded lately. It has jumped by more than 2.7% from the lowest level in May. Also, the price has moved above the 25-day and 50-day moving average. It has also risen to the 61.8% Fibonacci retracement level. Therefore, in my view, the overall outlook of the DXY is bullish, with the next key level to watch being the 78.6% retracement at $92.60.

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