US Dollar Forecast: DXY at Inflection Point Ahead of Fed Outcome

U.S. Dollar Index Holds as Traders Wait on the Fed

The U.S. Dollar Index (DXY) is edging higher Wednesday but going nowhere fast. The market is parked between two moving averages and the Fed decision at 18:00 GMT is the only thing that matters today.

Technical Outlook

The U.S. Dollar is edging higher against a basket of currencies on Wednesday as it continues to navigate between the 200-day moving average at 98.536 and the 50-day moving average at 98.944. In my opinion, trader reaction to these two levels will determine the near-term direction of the greenback.

I also think it is fitting that U.S. Dollar Index (DXY) traders face this technical inflection point just hours ahead of the Federal Reserve’s April monetary policy decision later today at 18:00 GMT, a catalyst likely to drive positioning around these key moving averages.

Holding above the 200-day MA indicates the presence of buyers. Overtaking the 50-day MA will indicate the buying is getting stronger, but traders will still face resistance at the short-term retracement zone at 99.138 to 99.493. So I have to conclude that the true trigger point for an acceleration to the upside is the 61.8% level at 99.493.

If the 200-day MA fails to hold as support then watch for a potential plunge into the longer-term retracement zone at 98.097 to 97.496. This zone stopped the selling at 97.632 on April 17. If 97.496 is taken out with conviction, the sell-off that started on March 31 at 100.643 will resume.

In essence, the contained range indicates traders are waiting for a catalyst to drive the next major move. Clarity from the Fed could be both a bullish and bearish catalyst so traders should brace for heightened volatility.

Powell’s Last Meeting

This is almost certainly Jerome Powell’s final meeting as Fed chair and the market is already thinking past him. Kevin Warsh is next and he leans toward cuts. That transition matters more to me right now than anything Powell says this afternoon. But Warsh inherits an inflation problem and oil is not making it easier. The rate cut trade is not as clean as it looked three months ago.

The Fed’s Problem Has Not Changed

Inflation is still running above 2% and the labor market is not soft enough to hand the Fed a reason to move. Hold rates. Watch the data. That is what they do today and the vote will be nearly unanimous.

Gas prices have been climbing and energy costs do not stay contained. They run through everything. The Fed sees it in the pipeline data and so does the market. Nobody on the committee is pushing for cuts while oil is doing what it is doing.

Warsh Changes the Equation

The real trade sets up after today. Once Warsh takes the chair the question is how fast he moves and whether inflation gives him room. If he pushes toward cuts before CPI cooperates, the U.S. Dollar Index breaks lower. If energy keeps running and inflation stays sticky, he is stuck in the same spot Powell is in right now and the dollar holds its ground.

The way I see it, today’s decision is a placeholder. The 18:00 GMT announcement either sends DXY through the 50-day MA at 98.944 or breaks it back toward 98.097. One of those levels gets tested before the week is out.

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