USD forecast: Dollar index steady at 105 heading into Fed

DXY steady at 105 as dollar consolidates ahead of Fed meeting

On Tuesday, the U.S. dollar index (USDX) saw a slight decline, briefly dipping below 105 and marking the fourth consecutive session of losses. This movement came after the dollar hit a six-month high the previous week. Investors are now gearing up for the Federal Reserve's upcoming interest rate policy decision on Wednesday.

The consensus expectation is that the U.S. central bank will keep interest rates unchanged during Wednesday's meeting — however, investors will closely scrutinize the Fed's stance on inflation and its future policy actions.

The optimism regarding the Fed's ability to orchestrate a smooth economic transition has persisted after a week of predominantly positive U.S. economic data. Even if the Fed decides to maintain higher interest rates for an extended period, the hope is that it can achieve a “soft landing” — a slowdown in economic activity that doesn’t result in a recession.

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USD forecasts: All eyes on Fed comments, pause likely

Francesco Pesole, FX Strategist at Dutch bank ING, wrote that the U.S. dollar index would keep close to the 105 mark going into tomorrow’s Fed meeting, with rising oil prices providing support for the currency:

Markets.com Chief Market Analyst Neil Wilson shared his take on the upcoming FOMC meeting in an overview on Friday:

The Fed's dot plot is a chart that documents the projected key short-term interest rate of each Federal Reserve official. Within this plot, the dots indicate the anticipated midpoint of the federal funds rate at the conclusion of each calendar year — typically three years into the future — based on the officials' expectations regarding the evolution of the economy. The officials also include a dot representing their projection for the longer term, which signifies the "neutral rate of interest." This neutral rate is the point at which interest rates are neither stimulating nor constraining economic growth.

Each dot on the chart corresponds to a specific Federal Reserve official, ranging from Chairman Powell to board member Lael Brainard, and from New York Fed President John Williams to Chicago Fed President Charles Evans. The identities of the officials behind each dot remain anonymous, preserving the confidentiality of their individual projections.

In his G10 FX Daily overview on September 19, Scotiabank Chief Currency Strategist Shaun Osborne wrote that the Fed would need to provide extra supportive comments at tomorrow’s meeting for the USD to continue to strengthen:

In their most recent FX Snapshot dated September 11, analysts at Citibank Hong Kong’s Wealth Management division said:

Citi’s last cited 3-month dollar index forecast placed the DXY at 102.6, which could decline to 98.74 in 6 to 12 months’ time. The bank’s long-term dollar forecast saw the DXY trading at a potential average of 93.48.

Economic data aggregator TradingEconomics was bullish on the dollar in its most recent USD forecast, projecting the DXY index to possibly trade at 106.73 by the end of this quarter. The platform’s 12-month dollar forecast estimated the index to trade at a potential 111.05 by September 2024.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.