DXY index: US dollar forms a death cross ahead of FOMC minutes

The US dollar index (DXY) continued its strong downtrend this week as traders waited for the upcoming Federal Open Market Committee (FOMC) minutes, Jackson Hole Summit, and the Democratic National Committee (DNC) event. It plummeted to a low of $101.88 as investors embraced a risk-on sentiment.

FOMC minutes ahead

The US dollar has crashed against most currencies. For example, the EUR/USD exchange rate has soared from April’s low of 1.0600 to a high of 1.1100, its highest point since December 2023. It has jumped by over 6% from its highest point in 2023.

The GBP/USD pair has also soared to 1.3000, its highest point since July and much higher than last year’s low of 1.2038. Additionally, the USD/CHF and USD/JPY pairs have all dropped while the greenback has collapsed against emerging market currencies. Most Asian currencies have also slumped.

This price action has happened as investors have embraced a risk-on sentiment in the market. The CBOE VIX index, the best-known fear gauge in the United States, has fallen for eight consecutive days and is nearing its lowest point this year. Other US indices like the Dow Jones and the S&P 500 index are approaching their record highs.

The DXY index has collapsed as investors anticipate the Federal Reserve to start cutting interest rates as soon as in the September meeting. This trend accelerated after the US published several important economic data earlier this month.

The non-farm payrolls (NFP) data revealed that the economy created just 114,000 jobs in July while the unemployment rate rose to 4.3%. Wage growth continued falling during the month. Therefore, the Sahm Rule rose to 0.53%, raising recession risks in the country.

The US then released another mild inflation report. The headline Consumer Price Index (CPI) dropped to 2.9% in July while the core figure fell to 3.2%, meaning that the numbers are moving in the right direction.

Last week, another report showed that the manufacturing and industrial production continued retreating in July. Therefore, the Fed may be justified in exiting the high interest rate environment.

The next key US dollar index news will be the Federal Reserve’s minutes, which will come out on Wednesday. These minutes will provide more details about what the Fed’s officials deliberated in the last meeting.

Jackson Hole Symposium

The DXY index will also react to the upcoming Jackson Hole symposium, an annual jamboree of central bank and economists. Some of the most popular officials from the likes of the European Central Bank (ECB), Bank of Japan (BoJ), and the Bank of England (BoE) will talk.

The main headline of the meeting will be a speech by Jerome Powell, the head of the Federal Reserve, which will happen on Friday. In this speech, analysts expect him to confirm that the bank will start cutting interest rates as soon as in the upcoming meeting in September. 

Most analysts expect a 0.25% rate cut because other recent data have been relatively strong. For example, initial jobless claims have fallen for two consecutive weeks, meaning that the economy was not doing all that bad. 

Another report showed that the country’s retail sales continued soaring in July, meaning that consumer spending is still strong.

Soaring US debt

The other main reason why the DXY index has crashed is that the US public debt has surged and no political party is committed to reduce it. Data shows that the debt has recently crossed the $3.5 trillion mark and the uptrend is continuing.

Neither Kamala Harris nor Donald Trump have shed ideas on how to reduce this debt. The Democratic National Platform had ideas on tackling the climate crisis, securing racial wealth gap, gun violence, and securing the border but no mention on slashing the soaring debt. 

Donald Trump’s plan would also lead to higher debt. Some of his pledges are more tax cuts, trade wars, and even a $5,000 child tax credit, which will not be paid for. Trump also intends to boost defense spending, meaning more money for defense merchants.

US dollar index analysis

The daily chart shows that the DXY index formed a double-top chart pattern around the $106.12 level earlier this year. This pattern’s neckline was at $104, its lowest point on June 4th of this year. In most cases, this pattern leads to more downside.

The US dollar index has also formed a death cross chart pattern as the 50-day and 200-day Exponential Moving Averages (EMA) cross each other. Also, the index has moved below the key support at $102.15, its lowest level on August 5. 

The MACD and the Percentage Price Oscillator (PPO) have also continued falling while the momentum indicator has pointed upwards. Therefore, the DXY index will likely continue falling as sellers target the key support at $101.