DXY index: Will the US dollar comeback continue in August?

The US dollar index (DXY) recovery continued as investors reflected on last week’s interest rate decisions by the Federal Reserve, European Central Bank (ECB), and Bank of Japan (BoJ). The index jumped to $102, the highest level since July 10th. It has rebounded by more than 2.47% from the lowest point in July.

Interest rate decisions

The DXY index continued rising after the Federal Reserve delivered its July interest rate decision. As was widely expected, the bank decided to hike interest rates by 0.25%, pushing them to the highest level in more than two decades.

Analysts are torn between what to expect in the coming months. Some analysts believe that the Fed will now pause for the rest of the year since inflation is falling at a faster pace than expected. Others expect the bank to continue hiking since core inflation remains higher than the 2% range.

Fed officials are also unsure about what to expect. In a statement on Monday, Chicago Fed’s president Austan Goolsbee said that he was still undecided about what to do in the next meetings. Instead, he promised to be data-dependent when making the determination.

The US dollar index also reacted to the ECB decision. Like the Fed, the bank decided to hike interest rates by 0.25%. It then signaled that it will pause for a while to assess the trends of inflation. On Monday, data showed that the European economy grew moderately in the second quarter.

The most important driver for the DXY index was the Bank of Japan (BoJ) decision. As I wrote here, the bank decided to tweak its yield curve control program.

Looking ahead, the next key USD news will be the upcoming US non-farm payrolls (NFP) data scheduled for Friday. Economists expect these numbers to show that the economy added over 200k jobs in July as the unemployment rate remained at 3.6%.

US dollar index forecast

DXY chart by TradingView

The four-hour chart shows that the DXY index has been in a strong comeback in the past few weeks. Along the way, the pair has crossed the important resistance level at $101.91, the lowest point on June 22nd.

The US dollar index has moved above the 25-period and 50-period moving averages while the Relative Strength Index (RSI) has moved slightly below the overbought level. It is nearing the 50% Fibonacci retracement level.

Therefore, the outlook of the US dollar index is bullish, with the next level to watch being at the 50% retracement at $102.20.