US Dollar Price Forecast: Dollar Retreats as ECB and BoE Hold Policy Steady; EUR/USD and GBP/USD Rally

Dollar Weakens After Fed Decision, European Central Banks Show Caution

The U.S. dollar has weakened after the Federal Reserve voted to keep interest rates the same. This decision had three dissenting votes who wanted an increase, and other nations have begun to adopt an approach of closely monitoring inflation rather than a more hawkish standpoint. Geopolitical tension in the middle east has provided the dollar with some safe-haven support.

The euro has been responding positively to the dollar’s weakness after the Federal Reserve meeting, although there are still negative, underlying financial conditions. The European Central Bank kept rates the same after an increase back in June, leaving the deposit facility at 2.25%, while Eurozone growth has stagnated. The Eurozone is significantly more sensitive to changes in energy price volatility due to the conflicts in the Middle East than the U.S. Over the course of the year, the differential in inflation has favored the U.S. over the Eurozone, but as the officials in the Eurozone have prepared to act, the Euro has benefitted.

Sterling has a similar task at hand. The Bank of England held Bank Rate at 3.75% with a 6-3 vote, with 3 in favor of an increase over 2nd round effects of inflation from increasing energy costs. The central Bank projects inflation will increase in the near term, and then slowly return to target. There is a more resilient than anticipated, more robust domestic economic activity. Policymakers stated that they will act if the energy-related pressures begin to affect wages and prices in a more sustained manner.

For the major currencies, the short-term outlook is focused more on the interplay of U.S. inflation numbers, how long the supply disruptions in the Middle East persist, and how responsive the European central banks will be to the widening price pressures. From a fundamental perspective, the key factors will continue to be the growth and interest rate differentials.

Dollar Index (DXY) Technical Analysis: Bearish Shark Breakdown Puts 99.86 Support in Focus

The Dollar Index has developed the bearish Shark harmonic pattern, and a breakdown below the long-term ascending trendline and both the 50-EMA (100.98) and the 100-EMA (100.99) has occurred. The impulse has been strongly bearish, and the RSI has declined to the low thirties and in the vicinity of the oversold region. With the trendline broken, the outlook remains bearish despite the potential for a counter trend rally.

To the downside, the first key support is at 99.86, with 99.40 following. The downside resistance is at 100.40, and 100.99 and 101.47 offer the most significant resistance. Until the trendline and moving averages are retaken, any rise will meet selling pressure.

The outlook remains bearish as long as DXY is below 100.99, and the recent breakdown has increased selling pressure to 99.86.

GBP/USD Technical Analysis: Sterling Holds Breakout Above Key Resistance Ahead of BoE

GBP/USD maintains a positive bullish sentiment after the breakout of significant resistance at the 1.3400 level, and price is now being contained around 1.3450. The pair currently trades above the 50-EMA (1.3366) and the 100-EMA (1.3367), showing a positive trend. The RSI has increased to be in the vicinity of 69, showing increased positive sentiment, although consolidation is expected due to the recent large upward price movement.

1.3474, 1.3542, and 1.3589 are successive resistance levels, and 1.3403 will be the first level of support. The large demand zone will be between 1.3298 and the increasing trend line.

The overall positive bullish sentiment will remain above the 1.3403 level. Market prices breaking above 1.3474 will lead to 1.3542, although the Bank of England news may lead to profit taking.

EUR/USD Technical Analysis: Breakout Above Descending Trendline Signals Bullish Continuation

EUR/USD has a bullish breakout above the long-term declining trendline and former resistance at 1.1474. Positive price movement is above 1.1513, the 50-EMA (1.1429), and 100-EMA (1.1420), and the RSI has increased to the high 60s, with favorable bullish movement and the RSI nearing overbought.

Immediate resistance is at 1.1529, then at 1.1575 and at 1.1620. Former resistance at 1.1474 is now support, with the breakout offering support at 1.1418.

While the breakout remains valid and buyers are in control, the EUR/USD trading pair remains above 1.1474. If prices sustain above 1.1529, the likelihood of target 1.1575 will strengthen.