US Dollar Price Forecast: Fed Hike Bets Rise as CPI Takes Center Stage; EUR/USD and GBP/USD Key Levels to Watch

Dollar Index Outlook: Dollar Firms as Fed Hike Bets Rise, While ECB Tightening Tests Euro

The US dollar begins its week with renewed fundamental support as soaring inflation and the Middle East energy crisis strengthen the case for another rate hike by the Federal Reserve. U.S. producer prices rose 0.4% in August and are another sign that pressed energy prices are beginning to impact inflation. Almost three-quarters of the bets made in Futures markets indicate that the Federal Reserve is expected to implement a 25 basis point hike at its next meeting. The 10 year treasury has also surged to 5%, indicating the market is becoming more concerned of stagflation.

The main event of the day will be the consumer price index. A higher than expected inflation reading would aid the market’s bets of a rate hike at the Fed’s September meeting. A softer reading could reverse those expectations. The extended yield curve of the dollar is also giving the currency an added preference due to the fragile risk appetite caused by disrupted Middle Eastern energy supplies.

The ECB made two moves yesterday with a 25 basis point hike on its deposit rate to 2.5% and setting a forecasted growth rate of 0.9% for 2026. The ECB is also projecting average inflation of 3% for 2022 and 2.5% for 2027. For the ECB, even higher interest rates will help gel yield differential, but risk of weakening the economy further remains.

Sterling may be affected more by the policy divergence. The market is largely predicting that the Bank of England will keep interest rates at their current levels when they meet next. Bailey, who is the Governor, has been remarks against markets that show speculation of more hikes. GDP data for July is expected to show that the UK economy did not grow. The inflation and wage data will also help the BoE see how bad the effect of the energy shock will be on them.

Fundamental bias: DXY bears moderately, EUR bulls may be neutral, GBP bears may be neutral.

U.S. Dollar Index Technical Analysis: DXY Holds 98.72 as 99.16 Resistance Caps the Recovery

Currently, DXY is trading at 99.07, having recovered from the 98.72 support zone. What I am seeing is price has recovered above the short-term moving averages, but the recovery is running into the 99.16 resistance zone where sellers are stepping in. This keeps the recovery constructive, but not strong enough for me to consider it a reversal.

The first resistance zone I am looking at is 99.16. If price clears this, then 99.28 and 99.39 come into play. If price continues to fall, then 98.99 will until 98.88 and 98.72 become significant.

The RSI is above the midline, which is supportive of the recovery. Even with that said, I remain slightly bullish until DXY trades below 98.99. However, I prefer to remain on the sidelines until the hourly candle closed above 99.16, at which point I would be bullish again. I would become neutral again if DXY trades below 98.88.

GBP/USD Technical Analysis: Sterling Tests 1.3496 Support as Rebound Attempts to Build

Currently, on the 1 hour chart, GBP/USD is spot at 1.3509 after another pullback towards the 1.3496 support zone. I like to buy the dips because I think price is finding stronger support at currently at this level and the upward trendline. However I’m still Below the moving averages so I think the recovery has not impacted the dominant short term down trend.

1.3516 is the first resistance, with 1.3533 and 1.3560 as the next levels. On the downside, 1.3496 is the support with 1.3475 being the next functionality level.

The RSI has recovered from the oversold area but is still below the midline. I lean bullish, though neutral in stance, while GBP/USD trades above 1.3496. A sustained hourly close above 1.3533 would be bullish and create more favorable conditions, while below 1.3475 would create more bearish conditions.

EUR/USD Technical Analysis: Euro Tests Rising Support as 1.1618 Resistance Limits Upside

EUR/USD is trading at 1.1609, having fallen to touch the rising support line. What I am paying attention to is price, having traded below the moving averages, is in a broader consolidation zone with rising support and a falling resistance line. This is a neutral to bearish structure until buyers regain relevant resistance levels.

1.1618 is the first level of resistance I’m watching. A break above that level would target 1.1641. Resistance at 1.1656 would cap the move higher. In the event the market trends lower 1.1600 provides the initial support, with increasing focus on 1.1583 and 1.1566 as the trendline breaks to the downside.

Momentum as reflected by the RSI is milking the lower end of its range. Being snapped back into action quickly. I’m slightly tilted to the bear side while below the resistance window of 1.1618-1.1641. 1.1641 is the key level for neutralizing my bearish stance. I’d consider this in the event of a break above. 1.1583 is a supportive level that roughly maintains bearish stance below 1.1618.