US dollar index (DXY) forecast ahead of Fed, BoE, SNB decisions

The US dollar index (DXY) drifted downwards on Monday as forex traders braced for another tumultuous week in the market. It dropped to a low of $103.6, which was lower than last week’s high of $105.90. 

Banking crisis and Fed meeting

The DXY index will have a relatively busy week as investors react to numerous forex news in the market. On Monday, the pair was reacting to the happenings in Switzerland, where officials worked hard to rescue Credit Suisse, the second-biggest Swiss bank in terms of assets.

In a deal announced on Sunday news, UBS announced that it will take over the company in a deal valued at about $3.5 billion. The deal will wipe out the company’s $11 billion bondholders. Shareholders will lose over 50% of their Friday’s closing value while the Swiss government is on the hook for billions of dollars in litigation charges.

The banking crisis is not over as traders will watch the happenings in the US regional bank sector. A close focus will be on First Republic Bank, which came under pressure last week even as the biggest banks rushed to deposit $30 bullion. Its stock fell by over 30% last week.

The US dollar index will also react to the upcoming Federal Reserve interest rate decision. Economists believe that the Fed will take a more measured tone when it meets this week. It will attempt to balance the need for fighting the elevated inflation and ensuring the health of the financial sector.

As such, my crystal ball tells me that the bank will decide to hike rates by 0.25%, which will be lower than what Jerome Powell hinted in this month’s testimony to Congress.

The Fed will not be the only game in town since other key central banks will meet this week. As I wrote here, the Swiss National Bank will conclude its meeting on Thursday. The Bank of England and Reserve Bank of New Zealand (RBNZ) will also meet this week.

US dollar index forecast

DXY chart by TradingView

The 4H chart shows that the DXY index has been in a downward trend after peaking at about $105.85 this month. It has slipped even as global risks have remained at an elevated level. The index has slipped below the 25-day and 50-day exponential moving averages (EMA). It is slightly below the strong pivot reverse point of the Murrey Math Lines.

Therefore, the index will likely fall to the key support at $103.4 and then bounce back towards the Fed decision. If this happens, the index will likely rise to the key level at $104.50.