Dollar Index Outlook: Hawkish Fed Lifts Dollar as EUR and GBP Face Diverging Rate Paths
The U.S. dollar is currently benefiting from various bullish fundamentals following Wednesday’s Fed Meeting. The Fed raised the target range for the fed funds rate by 25 basis points to the 3.75% – 4.00% range, the first increase since February 2022. The presentation by the FOMC signaled that more increases could be forthcoming, possibly as soon as the end of the year.
Current expectations in the markets suggest that the Fed Funds rate will likely end the year above 4.50% to 5.00%, which will help strengthen the U.S. dollar.
The euro is expected to face some headwinds in the short term. Recently released data showed that labor costs in the eurozone rose by 3.1% in the second quarter, from 3.3% in the first quarter. However, the ECB’s wage index also showed that average wage increases were expected to be less than 2%.
With high energy prices and inflation, there is an upside risk for inflation, which argues for an aggressive rate hiking policy by the ECB.
Sterling is also set to take center stage on Thursday, with the Bank of England (BoE) expected to keep interest rates on hold at 3.75%, but likely providing hints on where rates could be headed in November. While UK inflation increased to 3.1% in August from 2.2% in July, core inflation remained unchanged at 2.6%. The recent increase in energy prices has not resulted in broader increases in other prices.
Markets have an 80% probability of a November rate hike by the BoE. However, most economists believe there is not enough justification to increase rates at this time. The recent deterioration in the UK labor market, in addition to increasing interest rates, argues against further rate increases.
The direction of the U.S. Fed is likely to set the tone for G10 currencies for the rest of the week. I see the DXY continuing higher, the GBP lower, with the EUR likely mixed. The BoE and the Federal Reserve are likely to further extend their policy divergence.
U.S. Dollar Index Technical Analysis: DXY Holds 100.08 Support as 100.37 Breakout Comes Into Focus
DXY is currently at 100.19 on the 1-hour chart. I think it is important to note the price has been able to trade above the rising trendline and both the 100 SMA and 200 SMA, after the recent bullish move. The recent corrective move from 100.37 has tested the 100.08-100.19 area, and as long as it trades above this area, the trend remains bullish.
I think the next major resistance is located at 100.37, above which, the next target is set at 100.53 and a further move above this level targets the 100.68 level. The 100.08 level is the major support level and above this level, the 99.99 and 99.90 levels become significant.
The RSI is still in the bullish territory and above the 50 level, suggesting the trend remains bullish. As long the DXY is above the 100.08 level and the rising trendline, I will remain bullish. A breakdown below the 99.99 level would change the trend and I would look to trade in the bearish direction targeting the 100.37 level. I would, however, look for the trend to reassert itself above the 100.37 level to gain a bullish bias toward the 100.53 and 100.68 levels.
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See all EUR/USD forecastsGBP/USD Technical Analysis: Sterling Holds 1.3369 Support as 1.3416 Caps the First Recovery Attempt
The British Pound is trying to recover against the U.S. Dollar above the 1.3388 level after it touched the 1.3369 support. However, the British Pound is trapped below the falling trendline and below the 100 and 200-hour moving averages. The recent fall broke several previous support levels and shows a bearish bias.
The first significant level to the upside is at 1.3416. If the British Pound rallies above this level, the next target for the bulls is at 1.3445, followed by 1.3468 and 1.3491. The support is located at 1.3369, and a breakdown of this level will expose 1.3330 and 1.3279.
Rising the British Pound above the 1.3416 and 1.3445 levels will invalidate the bearish bias. The 1.3468 level is the next bearish target, and a close below the 1.3369 level will confirm the resumption of the recent bearish trend.
EUR/USD Technical Analysis: Euro Rebounds From 1.1456 as 1.1478 Resistance Becomes the First Test
EUR/USD is currently trading at 1.1473. It bounced from 1.1456 and is currently trading between both moving averages. I believe this move is part of a bigger overall decrease and should be considered a retracement.
The first resistance is expected to be located at 1.1478. If 1.1478 is broken, expect additional resistance to be located at 1.1491, 1.1502, and 1.1513. 1.1456 is expected to provide support, with additional support located at 1.1444 and 1.1430.
The RSI is currently moving away from oversold territory. If 1.1491 and 1.1502 provide resistance, expect additional resistance to be located at 1.1513. If 1.1491 and 1.1502 provide support, expect support to also be located at 1.1456 and 1.1430.
If 1.1513 is broken to the upside, expect 1.1536 and 1.1557 to be targeted. If 1.1456 is broken to the downside, expect additional support to be located at 1.1421.
