US Dollar Price Forecast: Fed Decision Day Puts DXY, EUR/USD and GBP/USD in Focus

Dollar Strength Anchored by Fed Outlook as Euro and Sterling Face Policy Divergences

The dollar index was supported recently by the possibility that the Fed might increase rates when it announces its decision due Wednesday, July 29. Traders have given the US central bank a decent probability of hiking rates this year, with chances of a move in July hovering around 33 percent and a higher chance of a move in September, consistent with stronger-than-expected US economic data, energy-related upside inflation risk and a more hawkish stance implied by the Fed’s June projections under Chair Kevin Warsh. Relative growth outperformance against other developed nations, foreign capital flows into US assets, and periodic safe-haven inflows stemming from geopolitical risk associated with the situation in the Middle East have also added to the dollar’s appeal against a basket of currencies.

In contrast, the euro was weighed down by the widening interest rate differential between the United States and the European Union. In June, the European Central Bank increased its key deposit facility rate to 2.25 percent, which was its first increase in three years, before keeping rates unchanged in its latest meeting on July 23. Growth in the euro area is sluggish, as the ECB staff projection was revised lower in June and energy prices stemming from the ongoing war in the region continued to feed into overall inflationary pressures.

Officials at the ECB have not sounded too urgent about hiking rates further, but the gap between interest rate policy in the euro area and the United States still favors the dollar even though some market participants anticipate a possible narrowing in rate expectations later this year.

Meanwhile, the main catalyst for the British pound in the coming session will be the Bank of England’s rate decision on Thursday. Bank Rate is at 3.75 percent after two consecutive hold decisions by the Monetary Policy Committee. This time around, policymakers appear split between those fearful of second-round inflationary effects and those concerned about softer labor market conditions as well as weaker than expected readings from the most recent consumer price data release.

UK growth is likely to decelerate this year as the economy grapples with high energy prices and tighter financial conditions, although further fiscal austerity is likely to remain a concern going forward. Relative rate expectations as well as domestic political or budgetary developments may drive the pair this week.

Market participants will closely scrutinize the Fed’s statement and accompanying news conference for clues as to how policymakers view the interplay between the persistence of inflation and weakness in economic activity. The statement could ultimately determine whether the dollar’s recent uptrend continues or if narrowing rate differentials could lead to gains for the euro and sterling in the short term.

U.S. Dollar Index (DXY) Technical Analysis: Uptrend Holds Despite Rejection at Major Resistance

Despite selling pressure near 101.69, the USD Index is still maintaining its medium-term upward trend, staying above the ascending trendline as well as the 50-EMA (101.24) and 100-EMA (101.10). RSI has dropped to 46. Key resistance levels are located at 101.69, 102.06 and 102.42. On the flip side, support levels are seen at 100.96, 100.50 and 99.90.

As long as the USD Index is holding above 100.96, the uptrend should remain intact. A move above 101.69 could spark a fresh rally towards 102.06, while a break below 100.96 could see the index drop towards 100.50 and 99.90.

GBP/USD Technical Analysis: Bears Defend Former Channel Support

GBP/USD is still trading below the broken ascending channel after failing to reclaim former support. Price is also trading below the 50-EMA (1.3347) and 100-EMA (1.3360), while the RSI is around 40. Key resistance levels are located at 1.3349, 1.3416 and 1.3482. On the flip side, support levels are seen at 1.3272, 1.3210 and 1.3140.

As long as GBP/USD is holding below 1.3349, the outlook remains on the bearish side. If the pair breaks above 1.3349, the focus could turn towards 1.3416, while a move below 1.3272 would likely send the pair down to 1.3210.

EUR/USD Technical Analysis: Descending Trendline Continues to Cap Recovery

Failing to reclaim the broken ascending trendline, EUR/USD is now moving below the 50-EMA (1.1399) and 100-EMA (1.1413), while the descending trendline continues to act as resistance. The pair is staging a recovery from the 1.1364 support area, though upside gains remain constrained by the descending trendline. RSI is at 54. Key resistance areas are located at 1.1410, 1.1443 and 1.1481. On the flip side, support levels are seen at 1.1364, 1.1328 and 1.1294.

Since the EUR/USD is trading below 1.1410, the bias remains on the sell side. If the pair manages to rise above 1.1410, the focus could turn towards 1.1443, or if 1.1410 rejects price, the EUR/USD may retrace towards 1.1364.