U.S. Dollar At Crossroads Ahead Of Fed Interest Rate Decision On September 22

Traders Wait For Fed’s Key Meeting

The dynamics of the U.S. dollar will be in focus in the upcoming weeks as traders try to guess when the Fed will announce the reduction of its asset purchase program which will have a significant impact on many markets.

Back at the beginning of this year, many analysts were bearish on the U.S. dollar. They believed that huge support from the Fed together with stimulus from the U.S. government would push the American currency towards multi-year lows.

However, the reality was different, and the U.S. dollar gained ground against a broad basket of currencies this year. There are several reasons for this move.

First, coronavirus pandemic was not stopped, which provided more support to safe-haven assets like U.S. dollar.

Second, other currencies have also experienced problems. Euro suffered from low inflation and low interest rates in the eurozone. Pound failed to gain upside momentum as UK had problems with containing the pandemic despite a successful mass vaccination program. Australian dollar fell victim of strict lockdowns.

In recent weeks, the focus shifted to the potential reduction of Fed’s asset purchase program. Hawkish comments from several Fed officials pushed the U.S. dollar to yearly highs, but dovish words from Fed Chair Jerome Powell and disappointing job market data (ADP Employment Change and Non Farm Payrolls reports missed analyst estimates) put material pressure on the American currency.

In the upcoming weeks, the market will remain focused on the outlook for Fed’s policy. Recent job market data provides Fed with an opportunity to delay tapering for a few months in order to take a closer look at the dynamics of the labor market. In addition, coronavirus remains a significant issue.

However, the Fed must also keep an eye on inflation. The most recent inflation report indicated that inflation rate was 5.4% year-over-year in July, in line with June numbers. Some analysts have started to speculate that inflation has peaked while Powell reiterated his view that inflation was temporary. However, prices may continue to move up due to various challenges in the global supply chain (like the chip shortage) and labor shortages in some industries.

Foreign exchange market traders will have a chance to take a look at inflation data for August on September 14, while the Fed will announce its Interest Rate Decision on September 22. Thus, the Fed will have the latest inflation data on hand when it will be choosing whether to start tapering or wait for a few months.

A potential rapid reduction of Fed’s asset purchase program may provide additional support to U.S. dollar. While Fed officials have different views on whether Fed should begin tapering in the upcoming months, it looks that everyone agrees that tapering should be done in a fast manner.

Judging by the recent market action, some traders are willing to bet that Fed will start to reduce its asset purchase program soon despite Powell’s dovish comments and disappointing job market reports.

Technical Analysis

The weekly chart for the U.S. Dollar Index shows that it has recently made an attempt to settle above the marjor resistance level near 93.40 but lost momentum and pulled back towards the 20 EMA near 92.10.

The U.S. Dollar Index has also received support near the 20 EMA on the weekly chart during the previous pullback, so it’s an important moment for U.S. dollar bulls. In case the U.S. Dollar Index fails to settle below the 20 EMA, it will have a good chance to get to another test of the resistance near 93.40.

A move above this level will open the way to the test of the next material resistance level at 94.30. There are no significant levels between 93.40 and 94.30 on the weekly chart, and this move may be fast.

On the support side, a move below the 20 EMA on the weekly chart will push the U.S. Dollar Index towards the next support at 91.50.

Switching to the daily chart, we can see that there are many resistance levels between 92.10 and 93.40, so the road towards recent highs will not be easy. In the near term, the U.S. Dollar Index needs to settle back above the 50 EMA at 92.40 and then deal with the next resistance level which is located at the 20 EMA at 92.60.

On the support side, the nearest support level is located at 91.90. A move below this support level will push the U.S. Dollar Index towards the support at 91.50. It remains to be seen whether the U.S. Dollar Index will be able to find more support levels between 91.50 and 91.90, and it looks that it will have a good chance to gain downside momentum in case it manages to settle below 91.90.

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