The US dollar index (DXY) declined for the third straight day even as more Federal Reserve officials sounded more supportive of more than three rate hikes this year. The index is trading at $94.80, which is about 2.20% below the highest level in December.

Hawkish Federal Reserve

Minutes published last week showed that most members of the Federal Open Market Committee (FOMC) were supportive of about three rate hikes this year.

Now, some members of the committee seem open to the idea that of the Fed implementing more than four hikes this year. On Tuesday, Jerome Powell, the Federal Reserve chair said that the bank will likely be more aggressive about rate hikes this year.

In an interview with the Financial Times, Patric Harker of the Philadelphia branch of the Federal Reserve said that he was open to three hikes this year. He then added that if needed, he will be supportive of an additional rate hike.

He is not alone. In speeches this week, Fed members Esther George, James Bullard, and Loretta Mester said that they are supportive of these hikes. Still, these officials warned that they have few tools at their disposal to address the current inflation wave. Besides, this inflation is mostly caused by supply chain disruptions.

In theory, a hawkish Federal Reserve should be good for the US dollar index. However, the index has declined likely because the situation was already priced in by investors. 

Inflation peaking

Another reason why the DXY index has declined is likely because investors believe that American inflation has peaked. Data published on Wednesday showed that the country’s headline consumer price index (CPI) rose from 6.8% in November to 7.0% in December. This rally was driven by the rising food and energy prices.

Excluding the two, the country’s inflation rose from 4.8% in November to 5.5%, the highest in over four decades. Still, flash numbers point to the possibility that inflation will start easing in the coming months. 

For example, on Wednesday, economic numbers by the Chinese statistics agency showed that both the consumer and producer price index declined in December. As the biggest exporter, China is often seen as a measure of global inflation.

Still, with the spread between the current inflation and the Fed target of 2.0% being wide, it means that the Fed will have the motivation to hike.

At the same time, the position is also being supported by the American labour market. Data showed that the unemployment rate has continued to drop in the past few months. 

The US dollar index has also declined as investors wait for more signs from other central banks now that the Fed has made its case. The most important one is the European Central Bank (ECB), which is expected to maintain a dovish tone this year. Analysts expect that the bank will be among the last major central banks to start hiking interest rates.

US dollar index forecast

The daily chart shows that the DXY index has been in a strong bearish trend in the past few days. The index managed to move below the key support level at $95.66, which was the lower side of the descending triangle pattern. It also moved below the 23.6% Fibonacci retracement level and the 25-day moving average. 

Therefore, the index will likely maintain a bearish trend as bears target the 38.2% retracement level at $94.00.

The daily DXY chart