Above 101.50: US Dollar Index Price Forecast points to bullish DXY bias ahead of FOMC

After recovering from an intraday decline, DXY seeks to extend Friday’s modest rebound.
With the pivotal FOMC decision in focus, bullish traders nevertheless appear reluctant to commit.
Technical indicators favour further upside as the path of least resistance.

101.60-101.55 draws dip-buying interest on Monday. The US Dollar Index (DXY), a measure of the Greenback against a basket of currencies, is seeking to extend Friday’s rebound from near a three-week low. Modest intraday gains persist in early European trading, but follow-through remains limited. The index stays below 102.00 as traders await clearer signals on the Federal Reserve’s (Fed) policy trajectory.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Wednesday’s conclusion of the two-day FOMC meeting therefore remains the central focus, alongside Fed Chair Kevin Warsh’s remarks at the subsequent press conference. Thursday’s Advance US Q3 GDP report and Personal Consumption Expenditures (PCE) Price Index will also be important in shaping the DXY’s next directional move.

For now, support for the US Dollar (USD) comes from growing acceptance that the US central bank will increase borrowing costs in response to inflation risks from high crude oil prices. Geopolitical risks also persist, with tensions between Saudi Arabia and the Iran-backed Houthis in Yemen reinforcing demand for the safe-haven Greenback and underpinning the DXY.

Trading above both the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 38.2% Fibonacci retracement of the September-October advance leaves the index with a modest bullish bias. The Moving Average Convergence Divergence (MACD) line is also hovering just above zero. Meanwhile, the Relative Strength Index (RSI), close to 50, points to neutral but stable momentum.

As long as immediate support at 101.30 holds, the technical picture suggests the DXY could edge higher. This 38.2% retracement coincides with the 200-period SMA on the 4-hour chart. A decisive breach of that support confluence, however, would bring lower Fibonacci support levels at 100.78 and 100.27 into view. Broader structural demand lies towards 99.53 and 98.60.

At 101.93, the 23.6% Fibo. retracement provides the first upside hurdle, ahead of more substantial resistance at the cycle-high anchor near 102.96. Sustained buying above 103.00 would be regarded as a new bullish trigger, paving the way for a resumption of the established uptrend that began at September’s monthly swing low.

(An AI tool assisted in writing this article’s technical analysis. Learn more.)

4-hour chart: DXY

US Dollar: Key Questions

What role does the US Dollar play?

More than 88% of global foreign exchange turnover involves the US Dollar (USD). According to 2022 data, that represents average daily transactions of $6.6 trillion, making it the world’s most traded currency. The USD is the official currency of the United States of America. It also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. After the Second World War, the USD displaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

How does Federal Reserve policy affect the US Dollar?

Monetary policy is the single biggest influence on the US Dollar’s value. The Federal Reserve (Fed) sets that policy under a dual mandate: maintaining price stability by controlling inflation and promoting full employment. Adjusting interest rates is its main means of meeting these objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the Fed raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can create additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit in a stalled financial system. This unconventional policy is used when credit dries up because banks, fearing counterparty defaults, are unwilling to lend to one another. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose this tool to tackle the credit crunch. The process involves printing more Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

By ending bond purchases from financial institutions and allowing its existing bonds to mature without reinvesting the principal in new purchases, the Federal Reserve carries out quantitative tightening (QT). This reverses the QE process and generally supports the US Dollar.