U.S. Dollar Index (DX) Futures Technical Analysis – Fed Has a Lot More to Do to Contain Inflation

The U.S. Dollar is edging higher against a basket of currencies on Friday amid a concession by traders that the Fed will have to do a lot more to contain inflation. This suggests this week’s shifting in the odds of a 75 basis-point rate hike to a 50 basis-point in September may have just been a knee-jerk reaction to softer-than-expected declines in consumer and producer inflation in July.

What traders may have initially ignored is the fact that inflation remains at elevated levels and that the Fed has to remain aggressive over the short-run if it wants to drive inflation back to the mandated 2% level.

At 10:26 GMT, September U.S. Dollar Index futures are trading 105.215, up 0.221 or +0.21%. On Thursday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.14, up $0.02 or +0.05%.

The realization that the Fed has to continue to raise interest rates aggressively followed remarks from a number of Federal Reserve officials warning investors against being too optimistic after this week’s slight softening in inflation numbers.

The latest was San Francisco Fed President Mary Daly, who said on Thursday that a 50 basis point interest rate hike in September “makes sense” given recent economic data including on inflation, but that she is open to a bigger rate hike if data warrants.

It’s statements like this that are keeping the U.S. Dollar underpinned. The greenback could move even higher if the odds shift back toward a 75 basis-point rate hike in September.

Daily Swing Chart Technical Analysis

The main trend is down, but momentum may be getting ready to shift to the upside. A trade through 104.515 will signal a resumption of the downtrend. A move through 106.810 will change the main trend to up.

The main range is 101.170 to 109.140. Its retracement zone at 105.155 to 104.215 stopped the selling at 104.515 on Wednesday.

The minor range is 106.810 to 104.515. Its 50% level at 105.665 is the first upside target. The short-term range is 109.140 to 104.515. Its 50% level is potential resistance at 106.830.

Daily Swing Chart Technical Forecast

Trader reaction to the main 50% level at 105.155 is likely to determine the direction of the September U.S. Dollar Index on Friday.

Bullish Scenario

A sustained move over 105.155 will indicate the presence of buyers. If this creates enough upside momentum then look for a surge into the minor pivot at 105.665. Overcoming this level could trigger an acceleration to the upside with the resistance cluster at 106.810 to 106.830 the next likely upside target.

Bearish Scenario

A sustained move under 105.155 will signal the presence of sellers. This could lead to a retest of 104.515, followed by the main Fibonacci level at 104.215.