U.S. Dollar (DXY) Pulls Back After Testing New Highs

Key Insights

• U.S. Dollar Index failed to settle above the 110.50 level. 
• GBP/USD dropped to lows that were last seen back in 1985.
• USD/JPY rallied towards the 145 level. 

U.S. Dollar Pulls Back On Profit-Taking

U.S. dollar tested new highs but pulled back as traders continued to prepare for the Fed Interest Rate Decision, which will be released on September 21.

There is plenty of time ahead of the Fed decision, but traders increase their long bets on the dollar as the probability of an aggressive rate hike is rising. The FedWatch Tool indicates that there is an 80% probability of a 75 bps rate hike at the next meeting. The probability of an aggressive rate hike has been rising steadily in recent days.

As a result, the U.S. Dollar Index managed to get above the 110.50 level and made an attempt to settle above 110.80 before pulling back towards 110.20. In case the market remains convinced that the Fed will fight inflation at all costs, the U.S. dollar may move even higher.

EUR/USD Found Support Near 0.9900

EUR/USD is trying to rebound from the support at the 0.9900 level as traders wait for the ECB Interest Rate Decision, which will be released tomorrow. Analysts expect that the ECB will raise the rate from 0.5% to 1.25%. As usual, markets will be extremely sensitive to ECB comments.

Potentially adding fuel to the fire, the EU plans to cap the price of Russian gas. Russian President Vladimir Putin has already warned that price caps would be viewed as a violation of current contracts. A total cut of Russian gas flows to Europe will put significant pressure on the euro, but this scenario remains highly speculative.

Most likely EUR/USD trading will stay choppy ahead of the ECB decision, although the euro may get some support from traders who are willing to bet on hawkish commentary from the ECB.

GBP/USD Drops To New Lows

GBP/USD dropped below 1.1450 as traders reacted to comments of the BoE Governor Bailey. He did not say anything special that could provide support to the pound, so GBP/USD declined to levels that were last seen back in 1985.

The British pound remains under significant pressure as traders fail to find any bullish catalysts. However, GBP/USD is oversold, so the pound may have a good chance to rebound in the next few days due to profit-taking.

USD/CAD Moves Lower After BoC Interest Rate Decision

BoC raised the interest rate from 2.5% to 3.25%, in line with the analyst consensus. USD/CAD has moved away from 1.3200 after the decision. Currently, USD/CAD is moving towards the 1.3150 level.

Other commodity-related currencies are also trying to rebound. AUD/USD received support near 0.6700 and moved towards 0.6730, while NZD/USD failed to settle below 0.6000 and climbed back above the 0.6030 level.

USD/JPY Tests The 145 Level

USD/JPY rallied towards the 145 level before pulling back to 144.30 as traders continued to sell the Japanese yen. There are no positive catalysts for the Japanese currency, and there are no signs of interventions from the BoJ.

USD/JPY is overbought, so the Japanese yen may soon rebound due to profit-taking. However, the bullish trend in USD/JPY remains intact.

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