• The index is under some selling pressure near 107.00.
• U.S. yields are trying to rebound ahead of the Fed meeting.
• The Federal Reserve is expected to raise rates by 75 bps later Wednesday.

The Federal Reserve Board trade-weighted U.S. dollar index is on the agenda today. The dollar index (DXY), which measures the dollar against a few of its major peers, came under weak downward pressure Wednesday and is testing the 107.00 area.

U.S. dollar index analysis: The Fed is waiting for the U.S. dollar index

What is the US dollar index and what effect does it have on the financial markets? The index is now giving up some of the strong gains of Tuesday and is fluctuating around 107.00, amid caution ahead of the FOMC meeting later in the New York session.

The Fed is expected to raise its target range for the federal funds rate by 75 bps to 2.25%-2.50%, although investors will be watching closely the follow-up press conference by Fed Chairman Powell for further details on rate changes in the coming months.

In addition to the Fed meeting, the NA session will include data on durable goods orders, MAB mortgage applications, and the trade balance of goods at an advanced stage.

What to watch out for

After hitting near 20-year highs north of 109.00 in mid-July, the index has been under downward pressure, though for now it seems to have met decent support around 106.00.

For now, the dollar remains buoyed by the Fed’s divergence from most B10 central banks (especially the ECB), coupled with bouts of geopolitical activity and renewed risk aversion among investors.

On the other hand, market talk of a potential US recession could temporarily undermine the dollar’s upward trajectory somewhat. The US fed trade weighted real broad dollar index plays an important role in the world economy. 

Key events in the U.S. this week: MBA. Mortgage applications, durable goods orders, trade balance, pending home sales. Fed interest rate decision. Powell press conference (Wednesday) – preliminary Q2 GDP, initial filings (Thursday) – PCEprice index, personal income, personal spending, final Michigan consumer sentiment index (Friday).

Current issues in the background: Hard/soft/soft? landing of the U.S. economy. Escalating geopolitical tensions in Russia and China. A more aggressive Fed rate hike this year and 2023. Trade conflict between the U.S. and China. The future of Biden’s “Build Back Better” plan.

Current levels for the U.S. Dollar Index

The index is now down 0.20% to 106.98 and meets initial support at 106.11 (weekly low of July 22), then 103.67 (weekly low of June 27) and finally 103.41 (weekly low of June 16). On the other hand, a break above 109.29 (2022 high on July 15) would lead to 109.77 (monthly high of September 2002) and then 110.00 (round level).

Careful US dollar index analysis should be performed before deciding on a new trade.