US Dollar Price Forecast: Dollar Weakens as ECB Hike and U.S. CPI Take Focus

Dollar Index, EUR & GBP Outlook: Dollar Softens as ECB Hike Nears and Oil Revives Inflation Risk

The U.S. dollar continues to struggle on Wednesday, with positive domestic employment data countered by a quickly rising yen and uncertainty over what the Fed will do in September. Investors are almost evenly split between a 25 basis point Fed Funds rate increase and holding steady. This means that the Friday release of the U.S. consumer price index will be the key policy indicator. Rising Middle East oil prices are causing more inflation concerns, but policymakers still can’t determine how much and to what extent the shock will affect prices.

The Dollar Index is falling as the yen has appreciated by roughly 4% this month. Investors are selling the carry trades they financed with yen as both market observers and the Bank of Japan are speculating that the BOJ will tighten policy and Japanese yen capital will return home.

The euro is also waiting for the results of the ECB’s policy decision. The market is almost certain of another 25 basis point rate hike. The reflective deposit rate is expected to move to 2.50% along with a 3.3% increase in inflation in the Eurozone. Of perhaps more concern, is what the ECB will do after September if the energy shock remains.

For sterling, the Bank of England is taking a more cautious approach. All 65 economists polled by Reuters expect no change on September 17, and 57 expect no change by the end of the year. There is no evidence of second-round inflation from higher energy costs and costs to domestic firms. With higher costs of borrowing for the government, tighter financial conditions do not warrant immediate action from the BoE.

U.S. Dollar Index Technical Analysis: DXY Tests 98.71 as Bearish Trend Remains Intact

The U.S. Dollar Index is currently at 98.73 on the 1-hour chart. What is notable here is price action respecting the descending trendline as it drops below both moving averages. The continuing downtrend has brought price action back to the 98.71 level. Short-term structure is unchanged and stays in the bearish range, although we are approaching a range where a trading reaction is probable.

A break of the first support at 98.71 will expose 98.57 and then 98.42 further down. Conversely, if price action breaks resistance at 98.90, then it will become more important to watch the levels at 99.05 and especially 99.20.

Indicator RSI (Relative Strength Index) is in a weak range, confirming price action is likely to stay in the bearish range. As long as the 98.71 level holds, a break of 98.90-99.05 will warrant a closing price above 99.20. Without this, we are likely to see price action trade in a range around the support of 98.71.

GBP/USD Technical Analysis: Sterling Tests Descending Trendline as 1.3526 Support Holds

Currently at 1.3552, GBP/USD has had a bounce from the 1.3475 level on the 1 hour chart. At the moment the 1.3526 level has been tested, and is being traded above. However, price is being tested by a descending trend line that has capped meaningful upward moves since late August.

Upward moves have been capped at 1.3565 and 1.3599 and 1.3623. The 1.3526 level is currently providing support, and below that is the 1.3504 and 1.3475 levels.

Momentum is showing improvement as RSI is near the midline, but is not bullish on price just yet. For now I am neutral, but leaning slightly bullish. I will adapt that to bullish if price is able to move and close above 1.3565, lose that structure if price moves and closes below 1.3475.

EUR/USD Technical Analysis: Euro Presses Descending Trendline as 1.1639 Breakout Comes Into Focus

EUR/USD is trading at 1.1634 on the 1-hour chart. I am watching price action as it tightly presses the descending trendline while trading above the two moving averages. The multiple higher lows that have been forming since early September represent a lack of conviction in the bullish structure. We will need to see price action pierce through the 1.1639 level before the structure is resolved and considered bullish.

The first resistance I have here is 1.1639 and a clear break above this would show 1.1661, 1.1679 and 1.1711. If we go the opposite way then the first support is 1.1607 and 1.1584 and 1.1551 is beneath both.

RSI is above the mid-line and Holds, meaning there is improving upside momentum and not stretched. I have a slight bullish bias for the EUR/USD pair as long as it holds above 1.1607. I would consider the bullish case more strongly if 1.1639 is broken to the upside, and if it breaks to the downside 1.1584 I would become less bullish.