US Dollar Index (DXY) Prediction Ahead of FOMC and NFP Data

The US dollar index (DXY) has erased some of the spectacular gains it made on Friday after the US published the latest personal consumer expenditure (PCE) and income data. The index has declined to $93.93, which is about 0.45% below the highest level on Friday last week.

Fed decision ahead

The dollar index has declined as focus shifts to the Federal Reserve, which will start on Tuesday. The meeting comes at an important time for the American economy. 

Data published by Markit and the Institute of Supply Management (ISM) showed that American manufacturers are struggling as the cost of doing business increases. At the same time, many have complained about supply shortages and the ongoing logjam in international trade.

All this has contributed to a surge of consumer prices. On Friday, data by the government showed that the PCE data rose to 4.4% in September. This was the highest level it has been since 1991. This is notable since the PCE is the Fed’s favourite inflation metric.

At the same time, data published in October revealed that the country’s headline consumer price index (CPI) rose by 5.4% in September. The core CPI, which excludes the volatile food and energy prices, declined to about 4.0%. These numbers are substantially above the target set by the Federal Reserve of 2.0%.

Therefore, analysts expect that the Federal Reserve will deliver a relatively hawkish decision on Wednesday. This will likely happen in two ways. First, the Fed will leave interest rates unchanged between the range of 0.0% and 0.25%. It will then hint that it will start hiking interest rates in 2022.

At the same time, the Fed is expected to start tapering its asset purchases program. It could do this by slashing the size of the purchases by about $15 billion per month until June next year. Other central banks like the European Central Bank (ECB) and the Bank of Canada (BOC) have already started tapering.

US non-farm payrolls data

In addition to the Fed decision, the US dollar index will react to the upcoming US non-farm payrolls data scheduled on Friday.

There is a possibility that these numbers will show that the labor market continued to tighten in October. Economists polled by Reuters expect the data to show that the economy added more than 450k jobs in October. That will be a better number than the 194k that it added in September. However, it is worth noting that analysts have been wrong on NFP in the past two straight months.

They also expect the data to show that the unemployment rate declined from 4.8% in September to 4.7% in October. Most importantly, wages are expected to rise from 4.6% to 4.9% since companies are aggressively battling for talent.

Therefore, these numbers will provide a case for a more aggressive Federal Reserve since inflation is elevated while the unemployment rate is falling. At the peak of the pandemic, the US had an unemployment rate of almost 15%.

US dollar index forecast

On the four-hour chart, we see that the US dollar index made a strong comeback on Friday last week after the positive PCE data. It rose to a two-week high of $94.30, but it has pulled back slightly in the past few hours. 

The DXY is above the 25-day moving average, while the MACD has moved above the neutral level but is still pointing lower. The price is also above the important resistance level at $93.50, where it struggled to move below in October. Therefore, there is a likelihood that the index will make a comeback as bulls target last week’s high.