Dollar Index Outlook: Hawkish Fed Supports Dollar as Falling Oil Tests Rate-Hike Bets
The dollar is mostly higher on Wednesday, after officials from the Federal Reserve reiterated their hawkish outlook on the prior day. Waning crude prices have recently lessened odds for an extended hiking cycle.
If the U.S. economy looks like it is improving, with consumers spending and businesses investing, especially in the areas of manufacturing and defense, as Richmond Fed President Barkin said on Tuesday, then what is the Fed’s primary concern? For Barkin, it is not energy and it is not tariffs. Both are no longer major factors. The rest of the goods and services that the Fed uses to measure inflation are all elevated and above the 3% threshold.
With the Fed’s current trajectory, which aims to reach a terminal rate of 4.25%-4.50%, and Barkin’s remarks, it is highly likely that the target range will rise by another 25 bps by the end of the year. Despite a recent increase in odds for a rate hike in October, which now stands at around 53%, the greenback has appreciated against a basket of peers.
Although higher interest rates in the U.S. are historically positive for the euro, the recent hikes by the ECB and dovish outlook by most of its members means that the ECB will be behind the curve for an extended period. Falling energy prices mean that inflation will become less of a concern for the euro area.
The Bank of England (BoE) is in a delicate situation regarding interest rates. The BoE believes that further disruptions to the energy market could result in higher rates. Last week, the BoE kept rates at 3.75%. Currently, the markets expect there is a 65% chance the BoE will raise rates in November. Most market participants expect the BoE to raise rates four times in the next two years, each time by a quarter of a percent. Recently, economic data out of the UK has surprised to the upside. In August, UK retail sales rose. Also in August, UK economic growth was higher than expected.
Oil prices have the potential to move other asset prices in the foreseeable future. The U.S. and Iran have been in talks and have signaled they are willing to resolve their differences. Lower oil prices may reduce inflation and cause central banks to slow their pace of tightening.
The DXY (USD index) has the potential to appreciate; the EUR and GBP are expected to depreciate.
U.S. Dollar Index Technical Analysis: DXY Holds Above 100.53 as 100.83 Becomes the Next Upside Test
DXY is currently trading around 100.70. I think 100.53 is important support and it is bullish that DXY has traded above 100.53 and has also been trading along a rising trendline. Repeated defense of the 100.53 area indicates that buyers are dominant at these levels.
100.83 is the first resistance that I think is important and if 100.83 is taken out then expect 100.96 and 101.08 to be tested next.
Rising the Dollar index, expectations and position of the RSI, indicate that the dollar may be extending higher in the near term. If the dollar extends higher then look for support to be 100.33 and 100.19. Breaks lower than 100.33 would be significant. A break below 100.83 would be the first indication that a further move lower may be developing.
EUR/USD Price Forecast
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See all EUR/USD forecastsGBP/USD Technical Analysis: Sterling Breaks 1.3339 Support as 1.3308 Comes Into Focus
Currently GBP/USD is trading at 1.3316 and recently broke support at 1.3339. I think it is bearish that GBP/USD is trading below a falling trendline, and below both the 50 and 200 hour moving averages. With that being said the recent bounce has failed to get back above the broken support and resistive trendline.
1.3308 is support that is being targeted. If it is taken out then look for support at 1.3275 and 1.3239. Resistace at 1.3409 is a level that if taken out would indicate a larger move higher is developing.
The first support I have is placed at 1.3308. Expect 1.3285 and then 1.3262 below. As for upside, we have 1.3339, followed by 1.3375 and 1.3406.
RSI is indicating oversold conditions. I am looking for a bounce at these levels, but am not looking for a reversal. I am looking for a move lower as long as 1.3339 is holding resistance, and the trend line lower is trending lower. I am looking for a move higher to 1.3375 to reverse my bias. A break lower 1.3308 would open 1.3285. A break lower from here would indicate further movement lower.
EUR/USD Technical Analysis: Euro Breaks 1.1455 Support as 1.1418 Becomes the Next Downside Target
The Euro has been trending lower against the U.S. dollar, and most recently broke below 1.1455. It is currently being traded at 1.1427. I think it’s important to note that the Euro is trading below both the 100 and 200 moving averages, and is continuing to rise and respect the previous downtrend.
The next major support lies at 1.1418. If the Euro breaks below this level, the support would shift to 1.1398 and 1.1377. The 1.1455 level offers resistance in the near-term, and support would shift to the 1.1493 and 1.1523 levels if the Euro breaks and rises above these levels.
RSI is also indicating oversold conditions, which supports the downside momentum of the Euro. Regardless, I am thinking that the Euro will continue breaking lower, and shows no signs of recovery until it breaks and rises above 1.1455 and the 100 moving average. Should the Euro break lower and fall below 1.1418, it supports the case for lower levels of 1.1398 and 1.1377.
