US dollar index forecast ahead of Fed interest rate decision

The US dollar index (DXY) has been in a strong bullish trend in the past few months. It is trading at $98.90, which is the highest it has been since May 2020. It has jumped by over 10% from the lowest level in December 2020.

Fed decision ahead

The US dollar has made a strong comeback as investors react to the rising geopolitical risks and economic numbers from the United States. 

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The crisis in Ukraine has led to more demand for the US dollar, which is often seen as a safe haven when there are risks. In the past few days, Russia has continued shelling Ukraine and analysts expect that Putin’s desperation will lead to more damage. This week, talks between Russia and Ukraine ended without a deal.

The next key catalyst for the dollar index will be the upcoming interest rate decision by the Fed. Analysts expect that the Fed will deliver a relatively hawkish decision based on where the American economy is at.

For one, recent data shows that the US inflation has surged to the highest level in more than 40 years. The headline consumer price index (CPI) has moved to about 7.9% while the producer price index (PPI) has risen to over 8%.

At the same time, the American labor market is still tight. It added over 600k jobs in February while the unemployment rate declined to about 3.8% during the month. This is the lowest it has been since the pandemic started.

Based on the past statements by Powell, the bank will deliver a 0.25% rate hike this week as it tries to slow inflation down. In addition to the rate hike, the pair will react to the signals about future increases by the bank.

US dollar index forecast

The weekly chart shows that the DXY index has been in a strong bullish trend in the past few months. This rally accelerated after the index moved above the important resistance level at $94.71, which was the highest point on September 20th last year.

The index has moved above the 25-week and 50-week exponential moving averages. At the same time, the MACD and the Relative Strength Index (RSI) indicators have managed a bullish trend.

Therefore, there is a likelihood that the index will maintain a bullish trend after the FOMC decision. If this happens, the next key level to watch will be at $100.