US Dollar Forecast: DXY Volatility and Direction Hinge on FOMC, Data Gaps, Powell Guidance

Dollar Index Posts Weekly Gain, But Directional Bias Remains Muddled

The U.S. Dollar Index (DXY) rose 0.40% last week to close at 98.938, continuing a stretch of rangebound price action as traders balanced a soft inflation reading against a looming Fed policy decision. The restrained advance reflects continued investor uncertainty, with trading contained within the prior two weeks’ range and bounded by key weekly retracement levels.

Muted Volatility as CPI Miss Reinforces Dovish Shift

September’s Consumer Price Index undershot expectations across both headline and core measures. The data, delayed due to the ongoing U.S. government shutdown, bolstered market expectations for monetary easing. Futures markets now reflect near-certainty of a 25 basis point cut at Wednesday’s FOMC meeting, with December cut odds exceeding 98%. Despite this dovish tilt, the DXY finished marginally higher, supported by policy divergence and subdued inflation abroad.

Fed Meeting in Focus: Cut Likely, Guidance Will Drive Dollar Response

Traders are now squarely focused on Wednesday’s FOMC rate decision and accompanying statement. While a quarter-point cut to a 3.75%–4.00% target range is fully priced in, market reaction will hinge on forward guidance and Chair Powell’s tone in the post-meeting press conference.

With job growth slowing and inflation moderating, the Fed is under pressure to support labor conditions without reigniting price risks. The central bank’s challenge is compounded by limited data visibility, as the shutdown has delayed key labor and spending reports.

If the Fed signals additional cuts are likely, that would increase downside pressure on the dollar. Conversely, any effort to downplay further easing could offer near-term support to the index.

Treasury Yields Reflect Cautious Policy Outlook

Bond markets echoed this sentiment shift. The benchmark 10-year yield retreated below 4% to close near 3.966%, while shorter maturities showed similar declines.

With the Fed now weighing labor market deterioration more heavily than inflation risks, fixed income traders are positioning for a slower policy path through year-end. This cautious tone limited dollar upside, even as international rate expectations trended lower.

Technical Picture: Tight Weekly Range Signals Impending Break

According to the weekly chart, the DXY remains locked between two 50% retracement levels at 98.238 and 99.098, marking a period of investor indecision.

A breakout above 99.098 would indicate fresh buying interest, with the next resistance level at 99.563 and a potential upside extension toward the main top at 100.257. A move through that level would shift the main trend upward and place the 52-week moving average at 102.084 in focus.

Conversely, sustained pressure below 98.238 would confirm selling interest, opening the door to a possible test of the September low at 96.218.

Market Forecast: Neutral Bias with Downside Risk if Fed Confirms Dovish Tone

With the Fed widely expected to cut rates this week, the near-term directional bias hinges on the tone of Chair Powell’s press conference. Unless the Fed pushes back against easing expectations, downside risk remains elevated.

A dovish confirmation could prompt a break below 98.238, shifting focus to deeper support levels. Until a clear breakout occurs, the DXY is likely to remain rangebound, but increasingly vulnerable to a bearish resolution.

More Information in our Economic Calendar.