US Dollar Index Free Fall Pauses Ahead of FOMC Minutes – What Next?

USDINR
USDINR

The US dollar index (DXY) is slightly in the green today after tumbling to its lowest level in two years yesterday. The index is trading at $92.35, which is a few points above yesterday’s low of $92.10.

The greenback has recently been in trouble as investors follow the happenings in the United States. In Washington, Democrats and Republicans have failed to agree on a stimulus package even though the enhanced unemployment package has run out. In contrast, other countries are currently funding their recovery plans. A good example is the EU, which recently passed a multibillion recovery fund.

At the same time, the number of coronavirus cases in the US has been rising. The country recorded more than 30,000 new cases yesterday, bringing the total number of cases to more than 1.7 million and the number of deaths to more than 170K. Meanwhile, countries like China have been successful in controlling the disease.

The US dollar index has also declined because of the recent actions by the Federal Reserve, which is in an open-ended quantitative easing program. Indeed, its balance sheet has expanded to a record $7 trillion and analysts expect it to continue rising.

Later today, the US dollar index will react to mortgage data and FOMC minutes that will come during the American session. In these minutes, the bank will explain its criteria for the meeting that happened in July. For example, we will want to know whether the bank is considering negative rates if the economic situation worsens.

The dollar index will also react to inflation data from Canada, the UK, and the Eurozone. All these countries are likely to record a low rate of inflation that is below the BOC, BOE, and ECB target of 2%.

US dollar index technical outlook

The wekly chart below shows that the US dollar index (DXY) has been in a strong downward trend. It has been in the red in the past nine consecutive weeks. And yesterday, it moved to the lowest level in more than two years. The price is below all moving averages, which is a sign of how strong the downward trend is. Also, it is a few points above the 78.2% Fibonacci retracement level.

This retracement connects the highest point this year and the lowest point in February 2018. Therefore, the outlook for the DXY is still bearish until we see some signs of a reversal. As such, there is a possibility that the price will decline to about $90. Alternatively, a move above $95.0 will invalidate this trend.

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US dollar index weekly chart

US dollar index

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