Is it safe to buy the US dollar index (DXY) ahead of Fed decision?

The US dollar index (DXY) tilted upwards on Wednesday morning ahead of the latest US retail sales data and the Federal Reserve interest rate decision. The index is trading at $96.50, which is slightly below the key resistance at $97.

Fed interest rate decision preview

The DXY index is holding steady as investors wait for the latest US retail sales numbers. Economists expect the data to show that retail sales declined slightly last month as consumer prices. 

Precisely, they expect the numbers to show that sales rose by 0.7% in November after rising by 1.7% in the previous month. The core retail sales, which excludes the volatile food and energy products, is expected to have fallen from 1.7% to 0.9%. 

These sales numbers come a day after the US published strong producer price index (PPI) data. According to the Bureau of Labor Statistics (BLS), producer prices rose 0.8% in November leading to an annualised gain of 9.6%. That was the fastest YoY growth since 2010 when the data were first collected. The core PPI also surged to a record.

The US PPI data came a few days after the US published strong consumer price index (CPI) data. The numbers showed that the CPI surged to the highest level in almost 40 years. Still, analysts believe that the real inflation is significantly higher than that.

Therefore, focus shifts to the Federal Reserve, which started its meeting on Tuesday. Economists expect that the bank will double the size of its taper. The goal will be to end the asset purchases in the first quarter of the year. It will also signal that it will also hike interest rates several times in the coming year.

A hawkish Fed should be positive for the US dollar index. However, we could see a pullback since the situation has already been priced in.

US dollar index forecast

The four-hour chart shows that the DXY index has been relatively positive in the past few weeks. It is even approaching its highest level this year. The index has managed to move slightly above the 25-day and 50-day moving averages. It is also at a key resistance level where it has struggled moving above in the past few days.

Therefore, the pair will likely keep rising as bulls target the key resistance level at $97. However, a pullback is also possible after the Fed decision.