Technical analysis: US Dollar Index loses bullish momentum

The US Dollar Index (DXY) seems to have lost bullish momentum with the Relative Strength Index (RSI) indicator on the daily chart retreating below 60. DXY, however, continues to trade above the 20-day Simple Moving Average, currently located at 103.70.  

The index faces immediate resistance at 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) ahead of 104.50 (static level) and 105.00 (psychological level). 

On the downside, bearish pressure could increase if DXY closes the day below 103.70. In that scenario, 103.50 (static level) aligns as interim support before 103.00 (100-day SMA).

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.