US dollar index forecast as it soars to a 20-year high

The US dollar index (DXY) jumped to the highest level since December 2002 as investors reflected on the relatively hawkish interest rate decision by the Fed. The index is trading at $103.67, which is about 46% above the lowest level in 2008. 

Fed rate decision

The dollar index continued its bullish trend on Thursday after the Fed delivered a hawkish policy. When making its decision the bank decided to hike interest rate by 0.50%, which was in line with what analysts were expecting.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

The bank also signaled that it will start winding down its giant balance sheet in the coming month. The winding down will involve selling assets worth over $75 billion every month. This will be a significant measure considering that the bank was recently buying assets worth $120 billion per month.

Therefore, the dollar index is rising because the Fed has become the most hawkish Central Bank in the world. The European Central Bank (ECB) has signaled that it is not ready to start hiking interest rates while the Bank of Japan has signaled that it will even ease further. 

When making its decision on Thursday, the Bank of England warned that there is a likelihood that the economy will go through a recession. Therefore, analysts believe that it will pause making its rate hikes in the near term.

The next key catalyst for the US dollar index will be the upcoming US non-farm payrolls (NFP) data. Economists expect that the economy added less than 350k jobs in April while the unemployment rate rose by 5.4%. Analysts also expect that the participation rate rose to 66.5% in April.

Other recent data from the US have showed that the economic growth is slowing down. For example, retail sales gave eased while consumer confidence has declined.

US dollar index forecast

The US dollar index continued its bullish trend as worries about the Fed continued. The currency managed to move above the upper side of the ascending channel pattern. It has also moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has been in an ascending trendline.

The index will therefore continue rising as bulls target the next key resistance level at $105. A drop below the support level at 101 will invalidate the bullish view.