The US dollar index (DXY) is tilting higher ahead of the upcoming interest rate decision by the Federal Reserve. The index is trading at $96.43, which is a few points below its year-to-date high of $97.
Federal Reserve decision ahead
The Federal Open Market Committee (FOMC) members will start the final meeting of the year on Tuesday. It will be the most important meeting of the year since the bank will reiterate its plans for 2022.
Jerome Powell, the Fed Chair, has already provided hints about what the bank will do in this meeting. In testimony in congress two weeks ago, the chair said that he expects that the committee will embrace a more hawkish policy.
In its November meeting, the bank decided to start tapering its giant $120 billion per month quantitative easing (QE) program. It did that by reducing the amount of purchases by about $15 billion. Also, it pledged to continue slashing the purchases by $15 billion in the next few months.
Therefore, the bank will likely increase the size of the taper. It could do this by doubling the amount of tapering to about $30 billion. As such, if this happens, it means that the bank will end the QE program in the first quarter of the year.
In addition to tapering, the bank will also provide more hints about interest rate hikes. In the past few months, the regulator has hinted that it will start hiking interest rates in 2024. Therefore, there is a likelihood that the Fed will hint that interest rates will rise in 2022.
The hawkish tone of the Fed is expected due to several things. For one, recent data shows that the country’s labor market is tightening. The unemployment rate has declined to 4.2% while inflation has surged to the highest level in more than 4 decades.
Therefore, while the Fed has achieved its full employment mandate, it needs to tackle inflation more aggressively. Still, it is unlikely that higher rates will pull inflation to the Fed’s target of 2.0% soon. Besides, this inflation is mostly driven by ongoing supply chain disruptions.
Other central bank decisions
The DXY is made up of several currencies. Notably, the central banks of most of these legal tenders will meet this week.
The Bank of England (BOE) and European Central Bank (ECB) will conclude their meetings on Tuesday. With the number of Omicron variant cases rising in the UK, there is a likelihood that the bank will have a relatively cautious meeting. Before this outbreak, most analysts were expecting that the bank would start tightening this month.
The ECB is also expected to be relatively cautious because of the uneven recovery of the European Union. Some countries like Greece have been left behind at the current pace of recovery.
The US dollar index will also react to the latest decisions by the Bank of Japan (BOJ) and the Swiss National Bank (SNB). The two banks will also remain dovish because of the low inflation rate.
US dollar index forecast
The daily chart shows that the DXY index has been in a major bullish trend in the past few months. The index is trading at 96.45, which is above the 25-day and 50-day Moving Averages.
It is also slightly above the ascending trendline that is shown in black while the MACD and the Relative Strength Index (RSI) have risen. Therefore, there is a likelihood that the dollar index will keep rising ahead and after the FOMC decision.
