US dollar index: DXY smacked ahead of the Fed decision

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Written on Dec 12, 2022
Reading time 3 minutes
  • The US dollar index has been in a strong sell-off in the past few days.
  • It has crashed by over 8.45% from its highest point this year.
  • The index will react to the latest Fed interest rate decision.

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The US dollar index (DXY) remained under pressure in the past few weeks as investors wait for the upcoming Fed rate decision and US inflation data. It was trading at $104.98, which was the lowest level since August 11. It has crashed by more than 8.45% from the highest level this year.

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US inflation and Fed decision

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The DXY index has been in a strong bearish trend in the past few weeks as investors focus on the potential Fed pivot. Therefore, this week will be an important one for the greenback because of events in the US, UK, and European Union.

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The US will publish the latest consumer price index (CPI) data on Tuesday. Economists expect the data to show that the headline consumer inflation dropped from 7.7% in October to 7.3% in November. Core inflation, which excludes the volatile food and energy prices, is expected to drop to 6.2%. Details of the US inflation data are in this article.

The latest US inflation data will come a day ahead of the latest Federal Reserve decision. Economists expect that the central bank will continue hiking interest rates albeit at a smaller margin. The main estimate is that it will hike by 0.50%. 

Therefore, the headline interest rate hike will not have a major impact on the US dollar. Instead, the main catalyst will be the Fed statement on future hikes. A more hawkish tone will likely lead to more upside for the DXY index.

BoE and ECB decisions

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The US dollar index will also react to the forex news by the ECB and the BoE. Unlike the Fed, these banks are more vulnerable because of the ongoing recession in the UK. Economists expect that the ECB will hike by 75 basis points while the BoE will increase by 50 basis points. 

These rate decisions are important because the euro and sterling are the two biggest DXY constituents. Still, the main catalyst for the DXY will be the decision by the Fed. Data published on Monday showed that the UK economy avoided a recession as it expanded by 0.5%.

US dollar index forecast

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US dollar index
DXY chart by TradingView

The 1D chart shows that the DXY index has been in a strong sell-off in the past few months. As it dropped, it moved below the ascending channel shown in green. The sell-off has moved below all moving averages while the Relative Strength Index (RSI) has moved close to the oversold level. Chande momentum oscillator has remained below the neutral point of zero.

Therefore, the US dollar index will likely continue falling as sellers target the next key support at $100. A move above the resistance at $107 will invalidate the bearish view.

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