DXY index: Is the USD a good buy ahead of Fed decision?

By:
on Jul 27, 2022
  • The DXY index moved sideways as investors refocused on the Federal Reserve.
  • The bank is expected to deliver another giant rate hike of either 0.75% or 1%.
  • The dollar index has formed a head and shoulders pattern.

The DXY index moved sideways on Wednesday as investors refocused on the upcoming Federal Reserve interest rate decision. The US dollar index was trading at $107.02, which was about 0.7% above the lowest level this week. 

Federal Reserve decision ahead 

The DXY index moved sideways after data by Conference Board showed that consumer confidence declined sharply in July as worries about inflation continued. The data came in at 95.7, which was sharply lower than last year’s high of 107.

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Additional data revealed that new home sales declined sharply in June as mortgage rates continued rising. Just last week, data revealed that existing home sales, housing starts, and building permits declined in June. The same was true with the country’s retail sales numbers. 

It is against this backdrop that the Federal Reserve will conclude its two-day meeting on Wednesday. Economists expect that the central bank will continue with its aggressive policies it has embraced in the past few months. Precisely, they expect that the bank will decide to hike interest rates by either 0.75% or even by 1%.

The bank’s goal is to deliver a soft landing, where it brings down inflation without causing a recession. This will be unavoidable since the US is expected to publish the latest Q2 GDP data on Thursday. Analysts expect that the economy contracted for the second straight quarter, which is the real definition of a recession. 

Therefore, analysts now believe that the Fed will start undoing these rate hikes in 2023 in a bid to stimulate an embattled economy. 

Other central banks have also turned extremely hawkish. For example, the European Central Bank (ECB) delivered its first interest rate hike in over 11 years last week. The Swiss National Bank (SNB) also surprised investors by delivering a 0.50% rate hike. Further, the Bank of Canada decided to hike rates by a whopping 1%.

DXY index forecast 

DXY index

The four-hour chart shows that the US dollar index found a strong support at $106.30 this week. It is now hovering near the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved slightly above the neutral point of 50.

It has formed what looks like a head and shoulders pattern. Therefore, the index will likely have a bearish breakout as sellers target the next key support level at $105.

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