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US Dollar Index (DXY): ahead of the Fed meeting

Relevance up to 05:00 2022-07-28 UTC–4

The past week was negative for the dollar. The dollar index (DXY) dropped by 1.1% following its results, returning to the levels of the beginning of the month.

This week, so far, starts neutral for the dollar. As of this writing, DXY futures are trading near 106.61, 253 points below the local multi-year high reached on July 14 at 109.14. Inflation indicators of consumer inflation in the US reached a new, more than 40-year high in June. As follows from the data presented on July 13 by the US Bureau of Labor Statistics, US inflation jumped in June to the highest level in the last 40 years, amounting to 9.1% (annualized) against 8.6% in May and market expectations of 8.8%. At the same time, monthly inflation accelerated from 1.0% to 1.3%. The core consumer price index, which does not take into account volatile food and energy prices, although it decreased in June, still exceeded the forecast of economists and came out with a value of 5.9% (against 6.0% in May).

Such a sharp increase in inflation, despite the actions of the Fed, increased market participants’ expectations regarding a faster tightening of the monetary policy of the US central bank. As a result, the dollar strengthened, significantly outperforming its main competitors in the foreign exchange market.

Almost none of the economists now doubts the interest rate hike of 75 basis points at the Fed meeting on July 26-27. Moreover, the probability has increased that the Fed will raise the interest rate by 0.1% at once, considering inflation statistics.

Nevertheless, the dollar still fell from its local high of 109.14. Market participants assess the success of the Fed’s fight against high inflation, and so far, judging by the published statistics, inflation is winning, continuing to grow.

The latest data on inflation in the US will be published on August 10. Economists do not yet have complete information to make an accurate estimate. Therefore, market participants will carefully study the text of the accompanying statements by the Fed leadership with their assessment of the prospects for inflation in the US and the parameters of the US central bank’s monetary policy.

The Fed’s meeting will begin tomorrow, and it will publish its decision on interest rates on Wednesday at 18:00 (GMT). Fed Chairman Jerome Powell will hold a press conference, during which he will answer a series of media questions that could increase market volatility. Any unexpected announcements by Powell on the Fed’s monetary policy will increase volatility in dollar quotes and in the US stock market.

Investors want to hear Powell’s opinion on the Fed’s plans for this year. And his hawkish stance on the Fed’s monetary policy will be seen by market participants as a signal to open new long positions on the dollar.

Despite the current weakening, the dollar continues to dominate the foreign exchange market. The breakdown of the local resistance level of 109.00 will be a signal to increase long positions in DXY futures with the prospect of growth towards multi-year highs of 121.29 and 129.05, reached, respectively, in June 2001 and November 1985.

However, earlier signals for building up long positions on the DXY index (in the MT4 trading terminal, the dollar index is reflected as CFD #USDX) may appear at the breakdown of the resistance levels of 107.50, 108.00, given the strong bullish momentum and the long-term upward trend of DXY.

For today and for the first half of tomorrow’s trading day against the dollar, the publication of important macro-statistics in the economic calendar is not planned. However, this does not negate the possibility of a sharp short-term increase in volatility in the thin market. It is also possible that some investors will want to balance their portfolio ahead of the Fed meeting, which may also be accompanied by unexpected movements in the market and dollar quotes.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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