The US dollar index (DXY) dropped for the second day straight as investors waited for the upcoming Federal Reserve and European Central Bank (ECB) decisions. The index dropped to a low of $102.30, which was slightly above the year-to-date low of $100.37.
Fed and ECB decisions
The biggest forex news of the week will be the interest rate decisions by the Federal Reserve and the ECB. These decisions will come at an important time for the market as inflation remains at an elevated level while the regional banking crisis is underway.
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Economists believe that the Federal Open Market Committee (FOMC) will decide to hike interest rates by 0.25% in a bid to show its resolve against inflation. At the same time, the committee will deliberate more on the state of the economy after the collapse of First Republic Bank on Monday.
Therefore, there is a high likelihood that the Federal Reserve will point to a strategic pause that has been adopted by other central banks like the BoC and the Reserve Bank of India. A strategic pause gives the bank an opportunity to observe the implications of the recent interest rate hikes to the economy.
The American economy faces key challenges. First, there is the challenge of the banking crisis as other regional banks come on the verge of collapse. Shares of PacWest and Western Alliance have dived by double digits this week.
Second, there are concerns about the debt limit in the United States. Legislators are still divided about how to lift the debt ceiling. Janet Yellen, the Treasury Secretary warned that the government could run out of cash on June 1.
Finally, there are risks in the commercial real estate industry where valuations are tumbling.
The DXY index will also react to the upcoming ECB decision scheduled for Thursday. This is an important decision for the dollar since the euro forms the biggest part of the US dollar index.
DXY index forecast
The US dollar index has been in a tight range in the past few weeks. It has remained solidly above the important support level at $100.31, the lowest level this year. The index has moved below all moving averages while the Awesome Oscillator has turned green and is pointing upwards.
Therefore, at this point, there are two scenarios for the dollar. First, the index could resume the bearish trend and move below the key support at $100. Alternatively, the index, which has formed a double-bottom pattern, could rebound and retest the neckline of this pattern at $105.42.
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