US Dollar Index extends upside below the 104.00 mark, Fed rate decision looms

The US Dollar Index (DXY) trades on a positive note for the fifth straight day near multi-week highs during the early European session on Wednesday. The upside of the US Dollar is supported by the growing speculation that the Federal Reserve (Fed) will maintain its high-for-longer interest rate narrative as inflation in the US remains elevated. Investors await the Fed monetary policy meeting and press conference on Wednesday for fresh catalysts. At the press time, the DXY is trading at 103.88, gaining 0.06% on the day. 

The US Fed is expected to leave the interest rate unchanged in a range of 5.25% to 5.5% at its March meeting on Wednesday. The financial markets believe the first rate cut will most likely be in June, but it could be as late as July. After the meeting, traders will closely watch Fed Chair Powell’s press conference, which might provide insight into the timing and the number of rate cuts to expect in 2024. The hawkish remarks from the Fed might provide some support for the US Dollar in the near term. 

The US economic data in recent weeks suggested that inflation in the US is easing from its peak levels, but still above the 2% target. Additionally, the strong labor market data indicated the US would not need to cut rates to prevent a recession. Fed Chairman Jerome Powell stated that lowering the interest rate too early might trigger an upsurge in inflation and cause more pain for consumers. The Fed is expected to stick to its forward guidance, emphasizing that it needs more evidence that inflation is on a sustainable path towards its 2% objective before cutting rates.

Looking ahead, market participants will closely monitor the Fed interest rate decision later on Wednesday, along with the press conference and a Summary of Economic Projections, or ‘dot-plot’. On Thursday, the preliminary US S&P Global PMI data for March will be due. Traders will take cues from these events and find trading opportunities around the US Dollar Index.