US Dollar Price Forecast: Fed Hike Bets Lift DXY as EUR and GBP Weaken

Dollar Index Outlook: Fed Hike Bets and 5% Treasury Yields Lift Dollar as EUR and GBP Face Policy Tests

The U.S. dollar starts the week stronger on a strengthening fundamental backdrop, with higher energy prices and elevated Treasury yields. Market participants have a higher perception of the likelihood that the Fed hikes interest rates tomorrow at 93%. The 10-year Treasury yield broke 5% for the first time since October this year with most of the market expecting a rate hike, and this reinforced the advantage that the dollar has with respect to yield.

The Middle East conflict has exacerbated this situation. With increased violence in the region, disruptions to the flow of energy, and heightened concerns on inflation, all combined with weaker risk appetite, safe haven flows have favored the U.S. Dollar Index. While the dollar’s next substantial move may depend on the lengths the Fed is prepared to extend its tightening cycle, with the move largely priced in, for now market participants are focusing on the impact of the ECB’s rate hike.

The U.S. yield curve has strengthened and the ECB hiking by 25 basis points last week, but the economic impact of higher energy prices combined with the tightening financial conditions has been weighing on the euro. From a policy perspective, the backdrop is less supportive. Thus, the euro has been unable to extend gains from the ECB’s action, leading market participants to pay more attention to the impact of the U.S. yield curve on the euro.

Sterling continues to cool with recent data releases on UK labor from Tuesday. Unemployment remained at 4.9% and wage growth remained at 3.5%. Additionally, vacancies fell to 702,000, which is the lowest level since 2021. These numbers have given the Bank of England (BOE) the ability to remain patient with the high and rising energy costs that drive inflation. Initially, markets priced in less than a third chance of a rate hike for Thursday’s meeting. Although, many are now pricing in rate hikes this year after Thursday’s meeting.

Fundamental bias: DXY bullish, EUR neutral-to-bearish, GBP neutral-to-bearish, Wednesday’s Fed guidance and Thursday’s BoE decision will be the main catalysts.

U.S. Dollar Index Technical Analysis: DXY Holds Above 99.58 as 99.74 Becomes the Next Upside Test

Currently, the USD Index is trading at 99.65 on the 1-hour chart. The price is holding above the trendline which becomes increasingly higher, all while being comfortably above both the moving averages. The last break of 99.58 suggests that buyers are maintaining their control over the market, and might be approaching another cluster of resistance.

The first resistance comes at the level of 99.74. A break above this level would expose 99.88, and subsequently, 100.02. As for the support, 99.58 is the first level to watch for, with 99.44, and 99.31 gaining importance below this level with fading momentum.

The RSI is currently holding in the upper half of its range, suggesting that price is rising, but not enough to call this as an overextended market. I am currently bullish above 99.58, but would become less bullish with a downward break below 99.44. A strong break above 99.74 would justify a move towards 99.88 to 100.02.

GBP/USD Technical Analysis: Sterling Tests 1.3470 Support as Descending Trend Keeps Sellers in Control

GBP/USD remains around the 1.3470 level on the 2-hour chart. Notice how the price is trading below the descending trend line and both moving averages are positioned above. The last impulsive move lacked follow through and the pair quickly moved back towards the 1.3470-1.3465 zone.

From here I will watch the 1.3465 level. A break of this level suggests 1.3444 and even 1.3419 will come into play. On the upside, 1.3513 is an important resistance level first. Then we can see 1.3536 and 1.3568.

RSI confirms the trend with its location below the midline. Personally, I will continue to be bearish as long as GBP/USD remains below 1.3513 and the descending trend line. A strong 2-hour close above 1.3536 changes my view, while a drop below 1.3465 is a clear sign of a continuation of the downward trend.

EUR/USD Technical Analysis: Euro Breaks Below 1.1545 as 1.1524 Support Comes Into Focus

EUR/USD is currently trading at 1.1532 on the 1-hour chart, after breaking the support level at 1.1545. What is interesting is that price is now trading below both moving averages, and is also respecting the falling trendline. With successive lower highs and lower lows, the short term bias is clearly tilted towards the bears.

The first support I am monitoring is 1.1524. With a clean break below this level, we could see 1.1512 and 1.1499. The level of interest for selling would then grow above 1.1545. In the bull case, we are looking at 1.1564 and 1.1581 first.

RSI is in a range and weak, but also shows that pair is coming close to oversold territory. Currently bearish at EUR/USD trading below 1.1545, 1.1564. If EUR/USD breaks to the upside and trades above 1.1564, this would push me to become bullish. A break below 1.1524 would set bearish target even more.