DXY: US Dollar index forecast as the Omicron variant fears mount

Written by

Written on Dec 21, 2021

Reading time 3 minutes

The US dollar index has held steady after the recent FOMC decision.
The bank decided to leave interest rates unchanged.
It signalled that it will hike rates three times in 2022.

The US dollar index (DXY) price is hovering near its highest level this year as investors reflect on the recent Fed decision and the fast-spreading Omicron variant. The index is trading at $96.43, which is about 8% above the lowest level this year.

Fed and Omicron

The Federal Reserve concluded its two-day monetary policy meeting last week. In it, the bank decided to do what most analysts were expecting. It left interest rates unchanged at between 0% and 0.25%.

At the same time, the Fed decided to double the size of its tapering program to $30 billion. The goal is to end its quantitative easing program in March next year. This explains why the DXY index has held relatively steady in the past few days.

Other central banks also delivered their rate decisions last week. For example, the Bank of England (BOE) was among the most hawkish as it boosted rates by about 0.25%. The ECB signalled that it won’t hike rates any time soon while Norges Bank also boosted rates.

The biggest catalyst for the dollar inex this week is the ongoing trend in the Omicron variant. Recent data shows that the number of new infections has been on an upward trend. For example, the UK is recording more than 80,000 new cases every day. The US is seeing more than 120k new cases daily.

Therefore, there are concerns that these new cases will lead to a significant impact on the global economy. This, in turn, will push central banks like the Bank of England to pause their tightening processes.

There will be some key economic numbers this week but their impacts will be limited. On Wednesday, the US will publish the final reading of the third-quarter GDP data. The Conference Board will also publish the final consumer confidence data while the statistics agency will release the latest existing-home sales data.

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bullish trend in the past few weeks. Along the way, the index formed an ascending trendline that is shown in blue. It is now slightly above this ascending trendline. Also, the price is above the 25-day and 50-day moving averages.

Therefore, there is a likelihood that the dollar index will keep rising as bulls target the key resistance level at $98 in the coming weeks.