US Dollar (DXY): Lower as Fed Hikes Interest Rates for 10th Time, Hints at Future Cuts

US Dollar Index Highlights

• Fed raises interest rates to 5%-5.25%, highest since 2007
• Future rate hikes uncertain, despite inflation above 2% target
• Tighter credit could harm economy, jobs, inflation

US Dollar Index Overview

The US Dollar (DXY) is down sharply after the Federal Reserve increased its interest rates for the 10th time in a little over a year. This move was widely anticipated by the markets.

The central bank’s Federal Open Market Committee (FOMC) unanimously decided to raise its benchmark borrowing rate by 0.25 percentage point. The Federal Reserve also hinted that this current cycle of rate increases may be coming to an end.

At 18:05 GMT, June U.S. Dollar Index futures are trading 101.170, down $0.555 or -0.55%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is at $27.65, down $0.17 or -0.63%.

Fed Raises Interest Rates

The US Federal Reserve has raised interest rates to a range of 5%-5.25%, the highest since 2007.

Despite concerns over economic growth and a recent banking crisis, the Fed did not indicate future rate hikes would be frequent.

Inflation remains above the 2% target, but recent data suggests a softening of price increases.

The statement after the meeting acknowledged that tighter credit conditions could negatively impact economic activity, hiring, and inflation.

Some expect the Fed may need to cut rates later in the year due to slower growth and the possibility of a recession.

US Labor Market, Services Resilient

Despite manufacturing contraction, the services sector and the labor market remain resilient. Payroll processing firm ADP reported hiring by private sector companies increased by 296,000 in April, indicating issues with the jobs picture and supply-demand imbalance persist despite the Fed’s efforts to cool the job market.

Markets Foresee Fed Rate Cuts

While the Fed insists it is focused on inflation, markets anticipate that slower growth and the possibility of a recession may force the Fed to cut rates later in the year. The post-meeting statement reiterated that economic growth has been modest, while job gains have been robust and inflation elevated.

Technical Analysis

The main trend is up. However, momentum has shifted to the downside. June U.S. Dollar Index futures are currently testing support (S1) at 101.094.

A trade through S1 will indicate the selling pressure is getting stronger with 100.740 (S2) the next target. Taking out this level will change the trend to down and could possibly extend the downmove into (S3) at 100.420, followed closely by (S4) at 100.345.

Recovering (R1) at 101.303 and (R1) at 101.463 will signal the presence of buyers. We could see an acceleration to the upside since the move will be fueled by a combination of short-covering and aggressive speculating.