US dollar index (DXY) forecast: Fed and Evergrande woes in focus

The US dollar index (DXY) popped on Friday as investors remained concerned about contagion risks as the Evergrande crisis continues. The index rose to a high of $93.24, which was the highest level since August 23rd.

Evergrande and Federal Reserve

The biggest catalysts for the US dollar index this week will be the ongoing Evergrande crisis and the Federal Reserve decision. 

Evergrande, the second-biggest property developer in China, has made headlines in the past few weeks because of its significant debt crisis. The company has liabilities worth more than $305 billion, making it the most indebted developer in the world.

Unfortunately, the company has been unable to pay most of its debt, leading to a cash crunch within the organisation. It has struggled to sell homes in September, which is usually a leading month for developers. 

At the same time, it has stopped operations at most of its unfinished projects while lenders have stopped lending. In a statement last week, the company said that it had hired restructuring companies as it tries to solve its crisis. 

A collapse of Evergrande will be bullish for the US dollar index because of contagion risks. In most cases, investors tend to rush to safe havens when major risks emerge. 

The DXY index will also react to the upcoming Federal Reserve interest rate decision scheduled for Wednesday this week. The bank is expected to leave interest rates unchanged and send a clearer signal about its tapering plans. 

In a statement last month, Jerome Powell said that he believes the bank should start to reduce its monthly purchases by end of the year. The message was reiterated by other Fed officials like John Williams, Raphael Bostic, and Eric Rosengreen. 

The US dollar index will also react to the latest housing data from the United States. The government will publish housing starts, building permits, and existing home sales numbers.

US dollar index forecast

The four-hour chart shows that the US dollar index has been in a strong bullish trend in the past few weeks. The index remains above the ascending trendline shown in red. It has also moved slightly above the 25-day and 50-day moving averages (MA) while the Relative Strength Index (RSI) has moved to 72. 

Therefore, the DXY index will likely keep rising as bulls target the key resistance at $93.72, which was the highest level on August 20. On the flip side, a drop below $92.70 will invalidate the bullish view.