Why The Dollar Index Might Turn Lower After Fed Decision

Yesterday, the Bureau of Labor Statistics (BLS) released the CPI data. The data showed that the core CPI – which excludes the volatile food and energy products – rose at an annualized rate of 2.2% which was in line with the expectations. In general, the CPI rose at an annual rate of 2.8%, which was higher than the expected 2.5%. This was the fastest pace since 2012 and was a slight validation to the Philip’s Curve. The rising inflation was also attributed to an 11% jump in energy prices this year.

The data was released a day before the Federal Open Market Commission (FOMC) makes its decision on interest rates and the pace of future hikes. As such, there is a high probability that the Fed officials will hike rates today and signal for more hikes at a time when the inflation is moving faster than wage growth.

The dollar index is currently trading at $93.91. This index measures the performance of the dollar compared with its major peers including the euro, pound, yen, and Swiss Franc. In the past week, the dollar index has moved higher from a low of $93.21 as traders expect the Fed to continue tightening. As we near the decision, the index could continue moving up but since the rate hike is already baked in, the trend might turn lower as traders wait for the ECB decision tomorrow. This could see it test the important support of 93.47.

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