Will US Dollar Index strengthen post Fed outcome?

Since the beginning of July, the trend in dollar index has been positive, breaching 93.19 the highest level since Apr 1, on expectations that, as the US economy recovers the Federal Reserve would start to tighten its policies. However, as we get close to the Federal Open Market Committee (FOMC) monetary policy decision the greenback has pared some gains as traders are shunning big bets before Powell's remarks.

The Federal Reserve is schedule to release the interest rate decision later today and will be followed by Chair Jerome Powell's follow-up press conference. Since the June meeting, US inflation has continued to accelerate, while despite increasing unemployment rate, the job market remains resilient. Powell had reaffirmed at the Congressional testimony that inflation pressures are largely transitory, so the focus of the market shifts on timeline for tapering asset purchases, amid the robust US economic data.

The rapid spread of the Delta variant in the US has contributed to new coronavirus cases, and has put forex traders in soup. As its implication on Fed's tapering debate is mixed. The uptick in coronavirus cases may worsen sentiment and possibly lead to a lockdown suggesting that stimulus should be in place for longer. So if tonight's policy turns out to be dovish then it will put pressure on Treasury yields and dollar, unnerving the hawks who urge for tapering.

In our view, Fed would unlikely deliver any hints about tapering its asset purchases and probably wait for the late August's Jackson Hole Symposium. Later today, monetary policy measures will stay unchanged, with the Fed funds rate target will stay at 0-0.25%. Also, the central bank will not to offer any clues as to when it will begin "tapering" its so-called quantitative easing program, which is currently absorbing about $80 billion in US Treasuries and about $40 billion in agency mortgage-backed securities each month.

On the technical front, the US Dollar Index has retraced from its recent swing high of 93.19 levels. The current dip will extend towards 92-91.80 areas, only if the weakness persists during the coming sessions. The counter need to recover and trade above 93 levels consistently to see a bounce towards major resistance around 93.50 zones. A fresh upside leg towards 94.28/94.75 will be triggered only on a decisive breakout above 93.50. On the contrary, weakness below 91.80 levels will see the Dollar index entering into a corrective phase with downside targets of 91.40/90.80 levels.