US Dollar Forecast: DXY Rises as Fed Holds Rates and Signals Higher-for-Longer Policy

The Fed Held but the Market Heard Something Else

The Fed did what everyone expected on Wednesday and held rates steady, but the reaction across markets tells the real story. The dollar stayed firm, Treasury yields pushed higher and stocks struggled to gain traction, actually adding to earlier losses. That combination says one thing. The market is starting to accept that rates are not coming down anytime soon. This was even confirmed by the CME FedWatch tool, which puts a higher probability on a Fed rate cut in December.

The Dollar Has Room to Run but It Needs New Buyers

The dollar moved higher after the decision, and it makes sense. If the Fed is in no rush to cut and inflation is still running hot, there’s no reason to fade it. Technically, the U.S. Dollar Index (DXY) is in an uptrend based on the moving averages, trend line and swing chart.

A short-term retracement zone at 99.516 to 99.274 provided the support today at 99.465, which helped launch the rally into today’s high at 100.104. Standing in the way of a potentially huge breakout to the upside is 100.540. Although some will argue that the “trend is your friend”, with the dollar I’d like that friend to be new longs entering instead of old shorts exiting. It could make a difference as to the strength and duration of the rally.

The way I see it, the bar for easing just got pushed further out. The Fed is still talking about cuts down the road, but sticky inflation and rising oil prices make that timeline feel flexible at best. The Middle East isn’t helping either. The dollar keeps acting like the only safe place to be.

Yields Are Telling You Everything You Need to Know

Look at yields if you want the clearest signal. The 10-year is pushing higher and the 2-year is doing the same. The bond market is adjusting to rates staying higher for longer and it’s not subtle.

The U.S. Government Bond 10-Year Yield bounced off 50-day and 200-day moving average support at 4.195% and 4.164%, respectively. The subsequent rebound has the market in a position to test last week’s high at 4.29% and multi-month highs at 4.299 and 4.311. Taking out these levels could drive the dollar sharply higher, and gold and stocks could tank.

The hot PPI number didn’t help. Wholesale inflation came in well above expectations, and that’s before the recent jump in oil fully works its way through the data. If input costs stay elevated, inflation doesn’t cool as quickly as the Fed wants. That keeps pressure on rates and pushes yields higher.

Stocks Are Grinding Lower as the Market Resets

Stocks are reacting exactly how you’d expect in this environment. Higher yields, firm dollar, rising oil. None of that is supportive for equities.

This isn’t panic selling, it’s more of a grind lower as the market resets expectations. If rates stay elevated and inflation doesn’t ease, valuations get harder to justify. That’s why rallies are struggling to hold and why buyers are a bit more cautious right now.

June E-mini S&P 500 Index futures are feeling the heat late Wednesday after crossing to the weak side of the 200-day moving average at 6757.18. This puts it in a position to retest bottoms at 6656.00 and 6631.50.

Still no reason to panic but getting closer to the trigger point for an acceleration to the downside. I’m starting to believe that the number is 6553.25. But as long as the E-mini stays close to the 200-day MA, there is always the chance of a quick short-covering rally.

Bottom Line

At this point, everything comes back to inflation and energy. If oil stays elevated and inflation data keeps coming in hot, the Fed stays on hold longer than the market wants. And if that happens, the setup doesn’t really change. Dollar supported, yields firm, and stocks under pressure.

More Information in our Economic Calendar.