DXY: US dollar index forecast ahead of the Fed decision

The US dollar index (DXY) is in a holding pattern ahead of a relatively busy week when the Federal Reserve and other central banks will deliver their decisions. The index is trading at $96.18, where it has been in the past few days.

Federal Reserve decision ahead

The US dollar index declined slightly on Friday after the US published strong inflation numbers. The data revealed that the country’s headline consumer price index (CPI) rose to a multi-decade high of 6.8%. As such, these numbers proved that the Federal Reserve was wrong about the transitory nature of inflation.

The core consumer price index, which excludes the volatile food and energy prices, also rose to almost 5%. 

Focus now shifts to the relatively busy week that lies ahead. On Tuesday, the US will publish the latest producer price index (PPI) data. The factory-gate inflation numbers are expected to show that prices jumped by more than 9% in November.

On Wednesday, the Federal Reserve will conclude its monetary policy meeting. Analysts believe that this will be the most important decision of the year.

They expect that the bank will continue what it started in November. In the last monetary policy meeting, the bank decided to leave interest rates unchanged. At the same time, it also decided to start scaling down the amount of asset purchases by about $15 billion. The goal was to end the purchases by mid next year.

Now, analysts believe that the Fed will decide to leave interest rate unchanged and then tweak the asset purchases. The bank will signal that it will end its quantitative easing policy in the first quarter of the year.

At the same time the bank will signal that it will hike interest rates next year. The dollar index will also react to the interest rate decisions by the Swiss National Bank (SNB), Bank of England (BOE), and the European Central Bank (ECB).

Dollar index forecast

The four-hour chart shows that the DXY index started the year positively. It is trading at $96.20, which is a few points above the lowest level last Friday. It is along the 25-day moving average. Most importantly, the price has formed a triangle pattern and is nearing its confluence zone.

Therefore, the dollar index will likely remain in this range as investors wait for the US PPI data and the upcoming Fed decision.