DXY: US dollar index gains momentum after hawkish FOMC minutes

The US dollar index (DXY) is rising for the third consecutive day as investors reflect on the relatively hawkish FOMC minutes. The index rose to $92.65, which was the highest level since April 6.

FOMC minutes

The Federal Reserve published the minutes of the recent meeting. The minutes showed that some committee members started deliberating on when to start tapering the $120 billion monthly asset purchases. The members cited the relatively strong economic data like on retail sales and inflation. The minutes said:

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“Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets.”

At the same time, some members of the committee cautioned that these numbers were highly transitory since the American economy is in a reopening phase. Therefore, they supported the bank’s decision to continue with its asset purchases.

Still, the issue of tapering is expected to dominate the upcoming meeting. Some analysts believe that the committee will agree to start a slow process of tapering like what other central banks have done. For example, this week, the Reserve Bank of Australia decided to reduce the volume of asset purchases from A$5 billion to A$4 billion. Similarly, the Bank of Canada has also lowered the volume of asset purchases.

The US dollar index is also reacting to the performance in the bond market. The benchmark ten-year yield declined below 1.30% for the first time in almost 5 months. This signals that investors are no longer worried about inflation as they did before. Furthermore, the first rate hike is expected to come in the next two years.

Later on Thursday, the DXY will react to the latest initial jobless claims numbers. Economists expect the data to show that claims declined to a post-pandemic low of 350k last week from 364k in the previous week. They see the continuing claims falling from more than 3.469k to 3.3k. 

US dollar index analysis

Dollar index

The daily chart shows that the dollar index has bounced back afte falling to a low of $89.17 early this year. Along the way, the index has formed what looks like a W pattern whose neckline is at the $93.40 level. The pair has also moved above the Ichimoku cloud and the 25-day Arnaud Legoux moving average while the Relative Strength Index (RSI) has continued rising. Therefore, the pair will likely keep rising as bulls target the neckline at $93.40. On the flip side, a drop below $92.00 will invalidate the bullish view.

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