US Dollar Index outlook: Dollar in defensive mode ahead of key central bank policy meetings

US Dollar Index

The dollar index turned to red on Monday but remains within a narrow multi-day range, as traders stand aside, awaiting policy decisions from the US Federal Reserve, European Central Bank and the Bank of England.

The US policymakers are widely expected to further slow pace of policy tightening and hike interest rate by 25 basis points at the end of two-day policy meeting on Feb 1, while the other two central banks are likely to opt for 0.5% rate increase each, in the meetings on Thursday.

The dollar remains under strong pressure, holding in a steep fall for four straight months, deflated by dovish turn from Fed, as US inflation decreased in past few months and recent economic data showed that the US economy is performing well so far that boosted risk sentiment.

Analysts support the view of dollar’s further weakening, as the Fed is exiting its cycle of aggressive rate hikes (though the policymakers highlighted the need of further hikes and above initially estimated peak, due to expectations that inflation will remain elevated for some time), while the ECB and BOE are expected to keep hawkish stance, due to more difficult condition of their economies.

Diverging stances and converging interest rate values would add to demand for riskier assets and keep the dollar in defensive.

Technical picture remains firmly bearish on daily chart, with initial resistance provided by daily Tenkan-sen (101.94) which recently capped several attacks, followed by daily Kijun-sen (103.32), which should cap extended upticks and keep bears intact.

Res: 101.94; 102.64; 103.32; 104.05.
Sup: 100.52; 100.25; 100.00; 98.92.