DXY Price Analysis: Short Covering Rally Eyes 50-Day Moving Average at 98.082

Fed’s Measured Tone Sparks Dollar Short Covering

The U.S. Dollar Index (DXY) closed higher for the third consecutive session on Friday, rising 0.29% to 97.646. The rally followed a reversal bottom at 96.218 — a multi-year low just under the July 1 bottom at 96.377 — sparking a wave of short covering as sellers were caught below key support. The Fed’s midweek rate cut, paired with a less aggressive stance on future easing, shifted market sentiment and fueled the rebound.

Despite the prevailing downtrend, the move suggests short-term momentum may continue higher, with immediate resistance in focus. The 50-day moving average at 98.082 and the 50% retracement level of the recent two-month range at 98.328 form a strong technical barrier. This creates a short-term target zone between 98.082 and 98.238, where new short positions may re-enter the market.

Fed Dials Back on Rate Cut Expectations

While the Fed delivered the anticipated quarter-point rate cut, the updated “dot plot” projects only two more cuts this year, signaling a slower pace of easing. This contrasts with earlier market expectations of a more aggressive path. Marc Chandler of Bannockburn Forex noted that the market had been pricing in a more dovish Fed, and the less accommodating stance forced a recalibration.

Short positioning was crowded heading into the decision, with early-week weakness in the dollar suggesting traders expected a clear dovish signal. Instead, the restrained tone prompted a tactical unwind of dollar shorts, fueling the three-day rebound.

Yields Rise Despite Fed Cut as Long-End Reacts to Growth, Inflation

U.S. Treasury yields pushed higher Friday despite the Fed’s easing move. The 10-year yield hit 4.133%, its highest in two weeks, while the 30-year touched 4.75%. This backup in long-dated yields — counter to the rate cut — reflects concerns around fiscal deficits, issuance pressure, and modestly firmer inflation. Wells Fargo’s Scott Wren noted that Treasury yields are syncing with higher GDP expectations and signs that inflation is not cooling as quickly as forecasted.

Sterling Slips on UK Fiscal Concerns, BOJ Dissent Buoys Yen

Sterling underperformed on Friday, falling 0.6% to $1.347 as UK borrowing figures surged past expectations, raising concerns over the sustainability of fiscal policy.

Meanwhile, the yen found modest support after a surprise dissent within the Bank of Japan raised the possibility of earlier rate hikes, though the USD/JPY pair settled near 147.93 after a volatile session.

Market Forecast: DXY Faces Resistance at 50-Day Moving Average and  98.238

While the DXY has staged a notable rebound off 96.218, the broader trend remains bearish. The zone between 98.082 and 98.238 — marked by the 50-day MA and Fibonacci retracement — is likely to attract renewed selling pressure. With Fed guidance limiting expectations for rapid easing and long-end yields rising, the dollar may consolidate below resistance before resuming lower unless inflation or growth data surprises to the upside.

If sellers don’t return following a test of the retracement zone and the rally continues, traders should consider that stronger forces are at work — and the entire “sell the dollar” strategy may be at risk of blowing up under a broad short-squeeze.

More Information in our Economic Calendar.