The US dollar index has pulled back in the last two weeks after soaring to a multi-year high earlier this year. It was trading at $107.90, down by over 2% from its highest level this month as focus shifted to the Bank of Canada (BoC), European Central Bank (ECB), and Federal Reserve interest rate decisions.
DXY index to react to key central bank decisions
The US dollar index retreated as key central banks in the index started to deliver their interest rate decisions.
In Japan, the BoJ decided to hike interest rates by 0.25% on Friday as inflation remained high. The bank also had a hawkish tilt, signaling that it may hike again in the next meeting. The USD/JPY has remained in a tight range since that decision.
Looking ahead, the Bank of Canada will publish its interest rate decision on Wednesday. The bank is expected to maintain a dovish tone this week by continuing its interest rate cuts as policymakers anticipate Donald Trump’s tariffs.
Fed and ECB interest rate decisions
The biggest catalyst for the US dollar index will be Wednesday’s Federal Reserve interest rate decision set to happen on Wednesday.
The bank will likely maintain high interest rates steady this week after cutting by 1% in 2024. Officials have hinted that the bank will embrace a wait-and-see approach as it observes trends on inflation this year.
The most recent economic data showed that the headline Consumer Price Index (CPI) rose from 2.7% in November to 2.9% in December. It has risen in the past few months, moving further from the 2.0% target.
The labor market strengthened a bit in December as the economy added over 254k jobs in December, while the unemployment rate fell to 4.1%.
The European Central Bank’s decision on Thursday will be the other key event that will move the US dollar index.
Economists expect the bank to cut rates by 0.25%, bringing the cumulative cuts to 1.25%. The bank is cutting rates because of the slow recovery of the European economy.
Unlike in the other sessions, the bank will likely start being hawkish because the economy is showing signs of recovery. Last week’s flash manufacturing and services PMI numbers showed some modest improvements.
US GDP and PCE data ahead
The US dollar index will also react to several macro data from the United States. The Conference Board will publish the latest consumer confidence data. This is an important report because consumer spending is the biggest part of the American economy.
The US will also release the first estimate of Q4 GDP data on Thursday. Economists expect the data to show that the economy grew by 2.7% in Q4 after growing by 3.1% in the third quarter. The statistics agency will also release the latest personal consumption expenditure (PCE) data.
US dollar index analysis
The daily chart shows that the DXY index peaked at $109.85 on January 13 to $106.5. It then bounced back to the current $107.50 ahead of key central bank decisions.
The index has remained slightly above the key important support level at $106.23, the highest swing in April last year. It has moved above the 50-day moving average.
The index has recently formed a morning star candlestick pattern, a popular bullish reversal sign. Therefore, there is a likelihood that it will bounce back, and possibly reach the psychological point at $109. A drop below last week’s low of $106.60 will invalidate the bullish view.
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