Image Source: Pexels
 

• The US dollar index has jumped by more than 6.28% from the YTD low.
• The Federal Reserve decided to leave interest rates unchanged between 5.25% and 5.50%.
• The focus now shifts to the upcoming Bank of Japan decision.

The US dollar index (DXY) price rally continued this month as investors reacted to interest rate decisions by several central banks. The index rose to a multi-month high of $105.72, ~6.28% above the lowest level this year.
 

Hawkish Federal Reserve

The US dollar index has reacted to several rate decisions and economic numbers. Data published last week revealed that US consumer inflation (CPI) was rising. It rose from 3.2% in July to 3.7%.

As a result, the Federal Reserve decided to deliver a hawkish pause on Wednesday. It left interest rates unchanged between 5.25% and 5.50%. Most importantly, the Fed hinted that it will deliver another 0.25% rate hike later this year.

The Fed's decision diverged from the European Central Bank (ECB), which decided to hike interest rates by 0.25% last week. Most analysts viewed the ECB hike as a more dovish one since Lagarde pointed to a pause.

Meanwhile, the Bank of England (BoE) and the Swiss National Bank (SNB) decided to leave rates unchanged. Most economists were expecting the two banks to hike rates by another 0.25% since inflation remains at an elevated level in the UK and Switzerland.

The next key catalyst that will move the US dollar index will be the upcoming Bank of Japan (BoJ) decision set for Friday. The BoJ verdict is crucial since the Japanese yen is a major part of the DXY.

As I wrote here, economists expect the BoJ will leave interest rates unchanged at -0.10%. What is unclear is the bank’s strategy to save the plummeting yen. The USD/JPY pair has jumped to the highest point since November 2022. It is a few points below its all-time high of 151.90.
 

US dollar index forecast

(Click on image to enlarge)

The daily chart shows that the DXY index has been in a strong bullish trend in the past few weeks. In this period, the index has now retested the 38.2% Fibonacci Retracement level. It is also nearing the important resistance at $105.90, the highest swing on May 8th.

The US dollar index is also about to form a golden cross pattern. In price action analysis, this is one of the most important bullish signs. Therefore, a move above the resistance at $105.90 will see it rise to the 50% Fibonacci Retracement point at

More By This Author: