DXY: US dollar index breaks key support after Fed decision

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 Jul 29, 2021
  • The US dollar index declined after the latest FOMC decision.
  • The bank left interest rates intact and pointed to January tapering.
  • The index will next react to the latest US GDP data.

The US dollar index (DXY) declined to the lowest level since July 13 after the latest Federal Reserve interest rate decision. The index is trading at $92.17, which was about 1% below the highest level this month.

Fed interest rate decision

The US dollar declined against all currencies that comprise the DXY after the Fed decision. After its two-day meeting, the bank left the interest rate unchanged between 0% and 0.25% as it continued supporting the economy amid a pandemic. 

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The bank also reiterated that it was not considering hiking interest rates at this time. The dot plot showed that the earliest that the bank will start rising interest rates gradually will be in 2023.

Meanwhile, the Fed also maintained its quantitative easing policies intact. In this, it will continue buying $120 billion of assets comprised of US Treasuries and mortgage-backed securities (MBS). The goal is to ensure that there is enough liquidity in the market.

Before the meeting, most analysts were expecting the bank to start talking about quantitative easing tapering. This is because the previous FOMC minutes showed that some officials were making the case for tapering. In a statement, Powell said that the bank will start these deliberations in the next meetings. The tone is mostly because the US is seeing more Covid cases, which could slow the recovery. In a note, an analyst at ING said:

“With the next FOMC meeting on 23 September, then one on 4 November, that should provide the Fed with the information it needs to make an announcement on 16 Dec, and start tapering in January 2022. That’s our house view, and it is increasingly the market view.”

Later today, the US dollar index will react to the latest US GDP data. The numbers are expected to show that the economy rose by more than 8% in the second quarter.

US dollar index analysis

Dollar index
US dollar index chart

The 4H chart shows that the DXY index formed an ascending channel in July. This week, the index managed to break below the lower side of the channel. Further, it moved below the 50-day and 100-day moving averages while the Relative Strength Index (RSI) moved below the oversold level. 

Therefore, the path of the least resistance for the index is lower. Still, we can’t rule out a situation where it retests the lower side of the channel in what is known as a break and retest pattern.

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