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US dollar index (DXY) forecast ahead of the Fed rate hike

By:
on Nov 2, 2022
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  • The US dollar index has recovered modestly in the past few days.
  • Focus shifts to the upcoming Fed interest rate decision.
  • Analysts expect that the Fed will hike by 75 basis points.

The US dollar index (DXY) has crawled back in the past few days as investors focus on the upcoming interest rate decision by the Federal Reserve. It rose to a high of $111, which was the highest point since October 25. It has jumped by more than 1.78% from its lowest point in October.

Fed interest rate decision

The US dollar index had a tough performance in October as hopes of a Fed pivot rose. Analysts and investors appeared to believe that the Fed will start pivoting in the coming months. This also explains why American indices like the Dow Jones and the Nasdaq 100 had their best month in years.

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The Fed will conclude its monthly meeting on Wednesday and deliver its highly-anticipated interest rate decision. Based on its previous dot plot, analysts expect that the Fed will hike interest rates by 75 basis points. This will bring the total rate hikes made this year to about 375 basis points.

The key catalyst for the DXY index will be the bank’s forward guidance on what to expect in the coming meetings. Analysts at Goldman Sachs expect that the Fed will point to another 50 basis points hike in December followed by two 25 basis point hikes in February and March. You can read more on Goldman Sach’s views here.

Other analysts expect that the Fed will signal that a few more 0.50% hikes are on their way. The argument is that inflation has not showed any signs of easing in the past few months. At the same time, the economy seems to be doing well.

For example, economic data published this week showed that the manufacturing PMI did well in October. Last week, GDP numbers showed that the economy made a recovery last month. 

Meanwhile, jobs data published on Tuesday revealed that the number of vacancies rose in September. And according to ADP, private payrolls rose by 239k in October while wages rose by 7.7%.

US dollar index forecast

US dollar index

The four-hour chart shows that the DXY index has recovered modestly in the past few days. It has managed to move above the key level at $110, which was the lowest level on October 4. The index is hovering near the 50-day EMA while the Relative Strength Index (RSI) has moved above the neutral point.

Therefore, the US dollar index will likely pullback after the latest Fed decision. If this happens, the next key level to watch will be at $110.

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