DXY index: US dollar forecast ahead of FOMC minutes

The US dollar index (DXY) rally continued this week ahead of the upcoming FOMC minutes. It jumped to a high of $103.27 on Wednesday, the highest level since July 6th. It has soared by more than 3.51% from the lowest level this year.

FOMC minutes ahead

The US dollar index has been in a strong bullish trend in the past few weeks as investors embraced a risk-off sentiment. There are risks about the American economy after Fitch downgraded the credit rating from AAA to AA+.

In a separate report, Moody’s downgraded a bunch of US regional banks and placed some prominent names like Northern Trust and State Street in review. Fitch has now warned that it could downgrade some big banks, including JP Morgan.

There is also a risk of China, the second-biggest economy in the world. China’s statistics agency published a series of weak economic data on Tuesday. Retail sales, industrial production, and fixed asset investments rose at a slower pace, pushing banks to slash the economic outlook.

Therefore, the US dollar has become a source of refuge among investors. This view was supported by the latest US retail sales numbers, which showed that spending remained resilient in July. Retail sales rose by 0.7% while core sales jumped by 1%, beating analysts estimates.

FOMC minutes ahead

The next important USD news will be the upcoming minutes of the last meeting by the Federal Reserve meeting. These minutes will provide more details about the deliberations that happened in the meeting and how members deliberated. 

The meeting came before the US published last week’s consumer inflation data. The headline CPI rose to 3.2% while core CPI dropped to 4.7%. Therefore, the outlook of the minutes could change since the Fed has more data to process ahead of next meeting on September 26th.

There are concerns that the restart of student loan repayments will slow consumer spending. In a note, analysts at ING said:

“The concern is that it (student loan repayments )will also heighten the chances of recession, which we believe will discourage the Fed from any further interest rate increases. Instead, we expect interest rate cuts from March 2024”

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bullish trend in the past few weeks. In this period, it has flipped the important resistance level at $100.75 into a support.

The index has also jumped above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) is approaching the overbought level. It is also approaching the key resistance level at $103.45, the highest point on July 6th.

Therefore, the outlook for the dollar index is bullish, with the next level to watch being at $104.62, the highest level on May 31st.