US dollar index (DXY) forecast ahead of the Fed rates decision

The US dollar index (DXY) price staged a strong comeback last week even after the weak economic numbers from the United States. The index rose from this month’s low of $99.57 to a high of $101.16. 

Fed interest rate decision

The US dollar index rose after the relatively weak economic numbers from the US. Early this month, data showed that the American non-farm payrolls (NFP) rose by 209k in June while the unemployment rate slipped to 3.6%. These numbers signaled that the economic growth was slowing.

Further data showed that the American consumer price index (CPI) dropped from 4.1% to 3.0% in June. Core inflation fell to 4.8% in June and there are signs that prices will continue falling in the coming months.

The housing sector has also started deteriorating. Housing starts and building permits slipped in June while existing and pending home sales dropped during the month. Retail sales retreated in June, signaling that consumer spending is falling.

The most important USD news to watch this week will be the upcoming interest rate decision by the Federal Reserve. Most analysts believe that the Fed will hike interest rates by 0.25% since inflation remains above 2.0%.

The bank will then signal that it will pause raising interest rates in the coming months since the economy is slowing.

The other important catalyst for the US dollar index will be the upcoming interest rate decision by the European Central Bank (ECB) and Bank of Japan (BoJ). Economists believe that the ECB will hike interest rates by 0.25% since European’s inflation remains higher than 2.0%. 

The Bank of Japan will likely change its tune and tweak its yield curve control program since the country’s inflation is above 2%.

US dollar index forecast

DXY chart by TradingView

The 4H chart shows that the DXY index has made a strong bullish comeback in the past few days. It has moved above the psychological level at $100, the lowest level on April 14th. It has moved above the 23.6% Fibonacci Retracement level. 

The 25-period and 50-period moving averages have formed a bullish crossover. It has formed a bullish flag pattern. Therefore, the index will likely continue rising as buyers target the 50% Fibonacci retracement point at $102.15.