US Dollar Index erases last Friday's gains, looks to close above 97

• NY Fed's manufacturing index disappoints in December.
• US 10-year T-bond yield slides on Monday to weigh on the greenback.
• Markets are focused on Wednesday's Fed announcements.

Ahead of this week's critical FOMC meeting, the US Dollar Index, which measures the USD's value against a basket of six major currencies, has gone into a consolidation phase on Monday and reversed Friday's gains. As of writing, the DXY was at 97.13, losing 0.3% on a daily basis.

Earlier in the day, the data published by the Federal Reserve Bank of New York revealed that the business activity in the manufacturing sector in the NY area expanded at a slower pace than expected with the headline general business conditions index slumping to 10.9 in December from 23.3 in November. "Looking ahead, firms remained fairly optimistic about the six-month outlook, though optimism was slightly more tempered than in November," the NY Fed further elaborated. 

In addition to the disappointing data, a sharp fall witnessed in the U.S. Treasury bond yields amid the dominating risk aversion put some extra pressure on the greenback on Monday. At the moment, the DXY was down 0.75% on the day at 2.868%.

According to the CME Group FedWatch tool, markets are pricing a 78.4% probability of a 25 bps rate hike this Wednesday. However, investors will be paying a close attention the number of rate hikes forecasted in 2019 and a change of language in the policy statement. Previewing the Fed meeting, "We expect a fall in the ‘dots’ to signal two further rate hikes in 2019 (down from three), but for 2020 to be unchanged at one rate hike. We also expect some tweaks to the statement, particularly regarding the need for ‘further gradual increases’ in rates, which was hinted at in the November minutes," said Bill Diviney, a senior economist at ABN AMRO.

Technical levels to consider

The initial support for the index aligns at 97 (psychological level/20-DMA) ahead of 96.55 (50-DMA) and 96.05 (Nov. 20 low). On the upside, resistances align at 97.70 (Friday high/2018 high), 98.10 (May 18, 2017, high) and 98.90 (May 16, high).